DEFM14A 1 d711492ddefm14a.htm DEFM14A DEFM14A
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  x                             Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨    Preliminary Proxy Statement
¨    Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
x    Definitive Proxy Statement
¨    Definitive Additional Materials
¨    Soliciting Material Pursuant to § 240.14a-12

Safeway Inc.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

¨   No fee required.
¨   Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
  (1)  

Title of each class of securities to which transaction applies:

 

 

  (2)  

Aggregate number of securities to which transaction applies:

 

 

  (3)  

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

 

  (4)  

Proposed maximum aggregate value of transaction:

 

 

  (5)  

Total fee paid:

 

 

x   Fee paid previously with preliminary materials.
¨   Check box if any part of the fee is offset as provided by Exchange Act Rule 240.0-11 and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
  (1)  

Amount Previously Paid:

 

     

  (2)  

Form, Schedule or Registration Statement No.:

 

     

  (3)  

Filing Party:

 

     

  (4)  

Date Filed:

 

     

 

 

 


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LOGO

June 19, 2014

MERGER PROPOSAL—YOUR VOTE IS EXTREMELY IMPORTANT

To the Stockholders of Safeway Inc.:

You are cordially invited to attend the annual meeting of stockholders (the “Annual Meeting”) of Safeway Inc., a Delaware corporation (“Safeway,” the “Company,” “we,” “us” or “our”), to be held at our corporate headquarters, 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, on July 25, 2014, at 1:30 p.m., Pacific time.

On March 6, 2014, we entered into an Agreement and Plan of Merger, dated March 6, 2014 and amended on April 7, 2014 pursuant to Amendment No. 1 (“Amendment No. 1”) and on June 13, 2014 pursuant to Amendment No. 2 (“Amendment No. 2”) (as amended, the “Merger Agreement”), with AB Acquisition LLC, a Delaware limited liability company (“Ultimate Parent”), Albertson’s Holdings LLC, a Delaware limited liability company and wholly-owned subsidiary of Ultimate Parent (“Parent”), Albertson’s LLC, a Delaware limited liability company and wholly-owned subsidiary of Parent (“Albertson’s LLC”), and Saturn Acquisition Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub” and, together with Ultimate Parent, Parent and Albertson’s LLC, the “Parent Entities”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent.

At the Annual Meeting, we will ask you to consider and vote on:

 

  1. a proposal to approve and adopt the Merger Agreement;

 

  2. a non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger;

 

  3. the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

  4. the election of nine directors, named as nominees in the attached Proxy Statement, to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

  5. a proposal to approve, on an advisory basis, the compensation of our named executive officers (“say on pay proposal”);

 

  6. the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

  7. two stockholder proposals, if properly presented at the Annual Meeting, which are opposed by our board of directors; and

 

  8. such other business as may properly come before the meeting and any adjournments or postponements.

If the Merger is completed, the Company will become a wholly-owned subsidiary of Parent, and each share of Company common stock, other than as provided below, will be converted into the right to receive (i) $32.50 in cash, (ii) a pro-rata portion of any net proceeds with respect to certain sales of (x) Safeway’s 49% interest (the “Casa Ley Interest”) in Casa Ley, S.A. de C.V., a Mexico-based food and general merchandise retailer (“Casa Ley”) and (y) Safeway’s real-estate development subsidiaries Property Development Centers, LLC and PDC I, Inc., which will own certain shopping centers and related Safeway stores (“PDC”), (iii) a pro-rata portion of certain after-tax amounts received by the Company as dividends or distributions in respect of the Casa Ley Interest or that are paid from the operating earnings of PDC, (iv) if the closing of the Merger occurs after


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March 5, 2015, $0.005342 per day for each day from (and including) March 5, 2015 through (and including) the closing of the Merger, and (v) if the sale of the Casa Ley Interest and/or the PDC assets are not fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, (x) one contingent value right relating to the sale of any remaining Casa Ley Interest and deferred consideration (a “Casa Ley CVR”) and/or (y) one contingent value right relating to the sale of any remaining PDC assets and deferred consideration (a “PDC CVR”). We refer to the amounts and rights in (i), (ii), (iii), (iv) and (v) above as the “Per Share Merger Consideration.” Any amounts to be received in connection with the Casa Ley CVR and/or the PDC CVR, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “Casa Ley Contingent Value Rights Agreement—Payment Not Certainbeginning on page 160 andPDC Contingent Value Rights Agreement—Payment Not Certainbeginning on page 168 for additional information. You are advised to approve and adopt the Merger Agreement only if you are willing to assume the risk that these contingent events may not occur and that there may be no cash consideration ultimately paid to you in excess of $32.50 per share of Company common stock. The Per Share Merger Consideration you will be entitled to receive will also be net of any required withholding taxes and will not include any interest. See “The Merger Agreement—Per Share Merger Consideration” beginning on page 120 for additional information. The following shares of Company common stock will not be converted into the right to receive the Per Share Merger Consideration in connection with the Merger: (1) shares held by any Parent Entity or any of their affiliates, (2) treasury shares and (3) shares owned by stockholders who have perfected, and have not withdrawn a demand for or lost the right to, appraisal rights under the Delaware General Corporation Law (“DGCL”).

Our board of directors, after careful consideration, unanimously determined that the Merger Agreement, the Merger and the other transactions contemplated thereby are fair to, advisable and in the best interests of the Company and its stockholders, and, subject to the terms of the Merger Agreement, recommended that our stockholders approve and adopt the Merger Agreement at the Annual Meeting.

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE PROPOSAL TO APPROVE AND ADOPT THE MERGER AGREEMENT.

The Merger cannot be completed unless the holders of at least a majority of the outstanding shares of Company common stock on the record date vote to approve and adopt the Merger Agreement. More information about the Merger is contained in the accompanying Proxy Statement, and a copy of the Merger Agreement is attached as Annex A thereto, a copy of Amendment No. 1 is attached as Annex B thereto and a copy of Amendment No. 2 is attached as Annex C thereto. We encourage you to read the accompanying Proxy Statement in its entirety because it explains the proposed Merger, the documents related to the Merger and other related matters.

Your vote is important, regardless of the number of shares of Company common stock you own.

The failure to vote will have the same effect as a vote against the proposal to approve and adopt the Merger Agreement. Whether or not you plan to attend the Annual Meeting, please take the time to submit a proxy by following the instructions on your proxy card as soon as possible. If your shares of Company common stock are held in an account at a broker, dealer, commercial bank, trust company or other nominee, you should instruct your broker, dealer, commercial bank, trust company or other nominee how to vote in accordance with the voting instruction form furnished by your broker, dealer, commercial bank, trust company or other nominee.

Thank you for your cooperation and continued support.

 

Very truly yours,

LOGO

ROBERT EDWARDS

President & CEO


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Neither the U.S. Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the Merger or the Merger Agreement, passed upon the merits or fairness of the Merger, or passed upon the adequacy or accuracy of the disclosure in the Proxy Statement. Any representation to the contrary is a criminal offense.

The accompanying Proxy Statement is dated June 19, 2014 and is first being mailed to stockholders on or about June 20, 2014.


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LOGO

SAFEWAY INC.

5918 Stoneridge Mall Road

Pleasanton, CA 94588-3229

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JULY 25, 2014

NOTICE IS HEREBY GIVEN that the annual meeting of stockholders (the “Annual Meeting”) of Safeway Inc., a Delaware corporation (“Safeway,” the “Company,” “we,” “us” or “our”), will be held at our corporate headquarters, 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, on July 25, 2014, at 1:30 p.m., Pacific time, for the following purposes:

 

  1. to approve and adopt the Agreement and Plan of Merger, dated March 6, 2014 and amended on April 7, 2014 and June 13, 2014 (as amended, the “Merger Agreement”), by and among the Company, AB Acquisition LLC, a Delaware limited liability company (“Ultimate Parent”), Albertson’s Holdings LLC, a Delaware limited liability company and wholly-owned subsidiary of Ultimate Parent (“Parent”), Albertson’s LLC, a Delaware limited liability company and wholly-owned subsidiary of Parent (“Albertson’s LLC”), and Saturn Acquisition Merger Sub, Inc., a Delaware corporation and wholly-owned subsidiary of Parent (“Merger Sub” and, together with Ultimate Parent, Parent and Albertson’s LLC, the “Parent Entities”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent;

 

  2. to consider and vote on a non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger;

 

  3. to approve the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

  4. to elect as directors the nine nominees named in the attached Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

  5. to consider and vote on a non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”);

 

  6. to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

  7. to consider and vote on two stockholder proposals, if properly presented at the Annual Meeting, which are opposed by our board of directors; and

 

  8. to transact such other business as may properly come before the meeting and any adjournments or postponements.

Only stockholders of record at the close of business on June 2, 2014 will be entitled to receive this notice and to vote at the Annual Meeting. A complete list of stockholders entitled to vote at the Annual Meeting will be open to the examination of any stockholder present at the Annual Meeting and, for any purpose relevant to the Annual Meeting, for at least ten days prior to the Annual Meeting, during ordinary business hours at our corporate headquarters at the address indicated above.


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This year’s annual meeting will be particularly significant, and your vote is extremely important. Whether or not you plan to attend the Annual Meeting in person, we urge you to ensure your representation by voting by proxy as promptly as possible. You may vote over the Internet as well as by telephone or by mailing a proxy or voting instruction card. Please review the instructions on each of your voting options described in the attached Proxy Statement. If you attend the Annual Meeting and inform the Secretary of the Company in writing that you wish to vote your shares in person, your proxy will not be used.

After careful consideration, our board of directors unanimously recommends that you vote “FOR” the proposal to approve and adopt the Merger Agreement, “FOR” the non-binding, advisory proposal to approve the compensation that may be paid or become payable to our named executive officers in connection with the Merger (the “Merger-related compensation proposal”), “FOR” the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement, “FOR” the election of the directors named in the attached Proxy Statement, “FOR” the non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”), “FOR” the ratification of the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014, “AGAINST” the stockholder proposal regarding labeling products that contain genetically engineered ingredients and “AGAINST” the stockholder proposal regarding extended producer responsibility.

Our board of directors, after careful consideration, unanimously determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are fair to, advisable and in the best interests of the Company and its stockholders, and, subject to the terms of the Merger Agreement, recommended that our stockholders approve and adopt the Merger Agreement at the Annual Meeting.

The approval and adoption of the Merger Agreement requires the affirmative vote of the holders as of the record date of a majority of the outstanding shares of Company common stock entitled to vote at the Annual Meeting. The approval of each of the proposals other than the proposal to approve and adopt the Merger Agreement requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the outstanding shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting.

Stockholders of the Company who do not vote in favor of approval and adoption of the Merger Agreement are entitled to demand appraisal rights in connection with the Merger if they meet certain conditions and comply with certain procedures under Section 262 of the General Corporation Law of the State of Delaware, which is attached to this Proxy Statement as Annex D.

Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to Be Held on July 25, 2014: The Proxy Statement and Annual Report to Stockholders for the fiscal year ended December 28, 2013 are available free of charge at www.safeway.com/investor_relations.

 

By Order of the Board of Directors,

LOGO

ROBERT A. GORDON

Secretary

Pleasanton, California

Dated: June 19, 2014


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TABLE OF CONTENTS

 

     Page  

PROXY STATEMENT

     1   

General Information About the Meeting

     1   

Annual Meeting of Stockholders

     2   

Voting Matters

     3   

SUMMARY TERM SHEET REGARDING THE MERGER

     4   

The Parties

     4   

Overview of the Transaction

     4   

Stockholders Entitled to Vote

     5   

Vote Required to Approve and Adopt the Merger Agreement

     5   

Effects of the Merger Not Being Completed

     5   

Merger Consideration

     6   

Casa Ley Contingent Value Rights Agreement

     6   

PDC Structuring

     9   

PDC Contingent Value Rights Agreement

     9   

Treatment of Options, Restricted Shares, Performance Share Awards and Restricted Stock Units

     12   

Effect on Blackhawk Distribution

     13   

Recommendation of the Board; Reasons for Recommending the Approval and Adoption of the Merger Agreement

     13   

Opinion of Financial Advisors to the Board

     14   

Financing of the Merger

     14   

Interests of the Company’s Directors and Executive Officers in the Merger

     16   

Conditions to the Merger

     17   

Regulatory Approvals

     17   

Solicitation of Acquisition Proposals

     17   

Termination of the Merger Agreement

     18   

Termination Fees and Reimbursement of Expenses

     20   

Remedies

     20   

Appraisal Rights

     21   

Market Price and Dividend Information

     21   

Litigation Relating to the Merger

     21   

Material United States Federal Income Tax Consequences

     23   

Additional Information

     23   

Anticipated Closing of the Merger

     23   

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE MERGER

     24   

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

     37   

MARKET PRICE AND DIVIDEND INFORMATION

     39   

THE ANNUAL MEETING

     41   

Date, Time and Place

     41   

Purpose of the Annual Meeting

     41   

 

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     Page  

Adjournments

     41   

Recommendation of the Board

     42   

Vote Required

     42   

Proxies without Instructions

     45   

Stock Ownership and Interests of Certain Persons

     45   

Record Date; Quorum

     46   

Voting

     46   

Revocation of Proxy

     47   

Solicitation of Proxies

     47   

Annual Meeting Admission

     48   

Other Matters

     48   

Householding of Annual Meeting Materials

     48   

Rights of Stockholders Who Object to the Merger

     48   

Assistance

     49   

PROPOSAL 1—THE MERGER

     50   

The Parties

     50   

Overview of the Transaction

     51   

Management and Board of Directors of the Surviving Corporation

     53   

Background of the Merger

     53   

Recommendation of the Board; Reasons for Recommending the Approval and Adoption of the Merger Agreement

     71   

Opinion of Goldman, Sachs & Co., Financial Advisor to the Board

     76   

Opinion of Greenhill & Co., LLC, Financial Advisor to the Board

     89   

Prospective Financial Information

     97   

Summary of the Projections

     99   

Appraisal Rights

     101   

Financing of the Merger

     105   

Interests of the Company’s Directors and Executive Officers in the Merger

     110   

Dividends

     113   

Regulatory Matters

     113   

Material United States Federal Income Tax Consequences

     114   

Delisting and Deregistration of the Company Common Stock

     117   

Litigation Relating to the Merger

     117   

THE MERGER AGREEMENT

     119   

Explanatory Note Regarding the Merger Agreement

     119   

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

     119   

Closing and Effective Time of the Merger

     119   

Per Share Merger Consideration

     120   

Treatment of Common Stock, Options, Restricted Shares, Performance Share Awards and Restricted Stock Units

     122   

Representations and Warranties

     125   

 

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     Page  

Operations of the Company Pending the Merger

     128   

Parent’s Financing Covenant; Company’s Financial Cooperation Covenant

     131   

Solicitation of Transactions

     136   

Stockholders Meeting

     139   

Stockholder Litigation

     139   

Filings; Other Actions; Notification

     140   

Employee Benefit Matters

     142   

Conditions to the Merger

     142   

Termination

     144   

Effect of Termination

     145   

Specific Performance

     148   

Sales of Casa Ley and PDC

     149   

Fees and Expenses

     151   

Indemnification of Directors and Officers

     151   

Access

     152   

Amendment and Waiver

     152   

Blackhawk Distribution and Tax Indemnity

     152   

Non-Survival of Representations, Warranties and Covenants

     153   

Other Covenants

     153   

CASA LEY CONTINGENT VALUE RIGHTS AGREEMENT

     154   

Explanatory Note Regarding the Casa Ley CVR Agreement

     154   

Payments

     154   

Dispute Mechanics

     156   

CVRs Non-Transferable

     157   

Shareholder Representative

     157   

Sale Process

     158   

Interim Operations of Casa Ley

     159   

Rights of the Casa Ley Holders

     159   

Amendments to the Casa Ley CVR Agreement

     159   

Damages and Suits for Enforcement

     160   

Termination

     160   

Tax Consequences of CVRs

     160   

Payment Not Certain

     160   

PDC CONTINGENT VALUE RIGHTS AGREEMENT

     161   

Explanatory Note Regarding the PDC CVR Agreement

     161   

Payments

     161   

Dispute Mechanics

     163   

CVRs Non-Transferable

     164   

Shareholder Representative

     164   

Sale Process

     165   

 

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     Page  

Interim Operations of PDC

     166   

Rights of the PDC Holders

     167   

Amendments to the PDC CVR Agreement

     167   

Damages and Suits for Enforcement

     168   

Termination

     168   

Tax Consequences of CVRs

     168   

Payment Not Certain

     168   

COMPANY-PDC LOAN AGREEMENT

     169   

Explanatory Note Regarding the Company-PDC Loan Agreement

     169   

Commitment

     169   

Payments

     169   

Interest Rate

     170   

Use of Proceeds

     170   

Covenants and Events of Default

     170   

Subordination, Non-Disturbance and Attornment Agreements; Subordination

     170   

BLACKHAWK DISTRIBUTION

     171   

PROPOSAL 2—MERGER-RELATED COMPENSATION

     172   

Non-Binding Advisory Vote on Merger-Related Compensation of Named Executive Officers

     172   

Vote Required and the Board’s Recommendation

     174   

PROPOSAL 3—ADJOURNMENT OF THE ANNUAL MEETING

     175   

Adjournment of the Annual Meeting

     175   

Vote Required and the Board’s Recommendation

     175   

PROPOSAL 4—ELECTION OF DIRECTORS

     176   

General

     176   

Vote Required and the Board’s Recommendation

     176   

CORPORATE GOVERNANCE PRINCIPLES AND BOARD MATTERS

     181   

Director Independence

     181   

Board Leadership Structure

     183   

The Board’s Role in Risk Oversight

     183   

Interested Party Communications with Directors

     183   

Board Meetings and Committees

     184   

Executive Compensation Committee Interlocks and Insider Participation

     186   

Consideration of Board Nominees

     186   

Majority Vote Standard and Director Resignation Policy

     187   

Policy Regarding Stockholder Rights Plans

     188   

Code of Business Conduct and Ethics

     188   

Policy Regarding Stockholder Proposals that Receive a Majority Vote

     188   

TRANSACTIONS WITH RELATED PERSONS

     189   

Policy and Procedures for the Review, Approval or Ratification of Transactions with Related Persons

     189   

 

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PROPOSAL 5—ADVISORY VOTE TO APPROVE THE COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS (“SAY-ON-PAY VOTE”)

     191   

Summary

     191   

Vote Required and the Board’s Recommendation

     191   

EXECUTIVE COMPENSATION

     192   

COMPENSATION DISCUSSION AND ANALYSIS

     192   

Executive Summary

     192   

Compensation Objectives and Philosophy

     195   

Compensation Peer Group

     196   

Elements of Compensation

     197   

How Compensation is Determined

     199   

Other Elements of Compensation

     207   

Other Compensation Policies

     210   

REPORT OF THE EXECUTIVE COMPENSATION COMMITTEE

     211   

SUMMARY COMPENSATION TABLE

     212   

GRANTS OF PLAN-BASED AWARDS

     215   

Description of the Operating Bonus Plan

     217   

Description of the Capital Bonus Plan

     217   

Description of the 2007 Equity Plan

     218   

Description of the 2011 Equity Plan

     220   

Description of the Blackhawk Plan

     221   

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END

     222   

OPTION EXERCISES AND STOCK VESTED

     224   

POST-EMPLOYMENT COMPENSATION PENSION BENEFITS

     225   

Description of Retirement Plans

     226   

Description of the SERP

     227   

NON-QUALIFIED DEFERRED COMPENSATION

     229   

Description of the Executive Deferred Compensation Plans

     229   

OTHER POTENTIAL POST-EMPLOYMENT PAYMENTS

     231   

COMPENSATION RISK MANAGEMENT

     234   

DIRECTOR COMPENSATION

     235   

EQUITY COMPENSATION PLAN INFORMATION

     237   

PROPOSAL 6—RATIFICATION OF APPOINTMENT OF DELOITTE  & TOUCHE LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR FISCAL YEAR 2014

     238   

Vote Required and the Board’s Recommendation

     238   

INDEPENDENT AUDITORS’ FEES AND SERVICES

     239   

Pre-Approval Process and Policy

     239   

REPORT OF THE AUDIT COMMITTEE

     240   

STOCKHOLDER PROPOSALS

     241   

PROPOSAL 7—STOCKHOLDER PROPOSAL REGARDING LABELING PRODUCTS THAT CONTAIN GENETICALLY ENGINEERED INGREDIENTS

     241   

Vote Required and the Board’s Recommendation

     242   

 

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     Page  

PROPOSAL 8—STOCKHOLDER PROPOSAL REGARDING EXTENDED PRODUCER RESPONSIBILITY

     244   

Vote Required and the Board’s Recommendation

     244   

COMMON STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS

     247   

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

     249   

STOCKHOLDER PROPOSALS AND NOMINATIONS

     250   

Stockholder Proposals for 2015 Proxy Statement

     250   

Fiscal Year 2013 Annual Report

     250   

HOUSEHOLDING

     251   

WHERE YOU CAN FIND MORE INFORMATION

     252   

Annex A: Agreement and Plan of Merger

     A-1   

Annex B: Amendment No. 1 to Agreement and Plan of Merger

     B-1   

Annex C: Amendment No. 2 to Agreement and Plan of Merger

     C-1   

Annex D: Section 262 of the General Corporation Law of the State of Delaware

     D-1   

Annex E: Opinion and Confirmatory Letter of Goldman, Sachs & Co., Financial Advisor to the Board

     E-1   

Annex F: Opinion and Confirmatory Letter of Greenhill & Co., LLC, Financial Advisor to the Board

     F-1   

 

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SAFEWAY INC.

5918 Stoneridge Mall Road

Pleasanton, CA 94588-3229

 

 

PROXY STATEMENT

General Information About the Meeting

This Proxy Statement contains information related to the annual meeting of stockholders (the “Annual Meeting”) of Safeway Inc., a Delaware corporation (“Safeway,” the “Company,” “we,” “us” or “our”), which will be held at our corporate headquarters, 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, on July 25, 2014, at 1:30 p.m., Pacific time, and any adjournments or postponements thereof. We are furnishing this Proxy Statement to stockholders of the Company as part of the solicitation of proxies by the Company’s board of directors (the “Board”) for use at the Annual Meeting and at any adjournments or postponements thereof. For your convenience, we are also pleased to offer a live audio webcast of our Annual Meeting on the Investor Relations section of our website at www.safeway.com/investor_relations.

This Proxy Statement is dated June 19, 2014 and is first being mailed to stockholders on or about June 20, 2014.

The following summary highlights information contained elsewhere in this Proxy Statement. This summary does not contain all of the information that you should consider, and you should read the entire Proxy Statement carefully before voting.

 

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Annual Meeting of Stockholders

 

•   Time and Date

   1:30 p.m., Pacific time, July 25, 2014

•   Place

  

Safeway’s Corporate Headquarters

5918 Stoneridge Mall Road, Pleasanton, California 94588-3229

•   Meeting Webcast

   The Annual Meeting will be webcast at www.safeway.com/investor_relations. Click on Upcoming Events to access the webcast. A replay will be available via webcast for approximately one week following the Annual Meeting.

•   Record Date

   June 2, 2014

•   Voting

   Stockholders as of the record date are entitled to vote. Each share of Company common stock present in person or by proxy is entitled to one vote for each director nominee and one vote for each of the proposals to be voted on.

•   Required vote

   The proposal to approve and adopt the Merger Agreement requires the affirmative approval of a majority of all outstanding shares of Company common stock. Each director is elected by a majority of the votes cast by the holders as of the record date of the outstanding shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). Each other proposal requires a majority of the votes cast by the holders as of the record date of the outstanding shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present).

•   Broker Non-Votes

   Without your instructions, your broker cannot vote your shares on proposals 1, 2, 3, 4, 5, 7 or 8 below.

•   Mailing Date

   June 20, 2014

 

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Voting Matters

 

 

  

Proposal

  

The Board’s
Recommendation

   For more detail, see
page
 
1.    Approval and adoption of the Merger Agreement    FOR      50   
2.    A non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”)    FOR      172   
3.    Approval of the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement    FOR      175   
4.    Election of the directors named in this Proxy Statement    FOR EACH NOMINEE      176   
5.    A non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”)    FOR      191   
6.    Ratification of appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014    FOR      238   
7.    Stockholder proposal regarding labeling products that contain genetically engineered ingredients, if properly presented at the Annual Meeting    AGAINST      241   
8.    Stockholder proposal regarding extended producer responsibility, if properly presented at the Annual Meeting    AGAINST      244   

 

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SUMMARY TERM SHEET REGARDING THE MERGER

This summary term sheet highlights selected information in this Proxy Statement and may not contain all of the information about the transaction that is important to you. You should carefully read this Proxy Statement in its entirety, including the annexes and the other documents to which we have referred you, for a more complete understanding of the matters being considered at the Annual Meeting. You may obtain without charge copies of documents incorporated by reference into this Proxy Statement by following the instructions under “Where You Can Find More Information” beginning on page 252.

The Merger Agreement (as defined below) is attached to this Proxy Statement as Annex A, Amendment No. 1 (as defined below) to the Merger Agreement is attached to this Proxy Statement as Annex B and Amendment No. 2 (as defined below) to the Merger Agreement is attached to this Proxy Statement as Annex C. You are encouraged to read the Merger Agreement and the amendment to the Merger Agreement because, together, they constitute the legal document that contains the terms and conditions of the Merger (as defined below).

The Parties

Safeway Inc. is one of the largest food and drug retailers in the United States, with 1,335 stores at year-end 2013. The Company’s U.S. retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas and the Mid-Atlantic region. In support of its U.S. retail operations, the Company has an extensive network of distribution, manufacturing and food-processing facilities. Safeway’s operating strategy is to provide value to its customers by maintaining high store standards and a wide selection of high-quality products at competitive prices and is focused on differentiating its offering with high-quality perishables.

AB Acquisition LLC (“Ultimate Parent”) is a holding company owned by Cerberus Capital Management, L.P. (“Cerberus”), Kimco Realty Corporation, Klaff Realty LP, Lubert-Adler Partners LP, and Schottenstein Stores Corporation or, in each case, by affiliates, affiliated funds, managed accounts and co-investors thereof and certain current members of management of the Parent Entities (as defined below).

New Albertson’s, Inc. (“NAI”), is an indirect wholly-owned subsidiary of Ultimate Parent. NAI operates 445 stores under the banner names Jewel-Osco, Shaw’s, Acme and Star Market and four distribution centers. The operations of NAI are located in 12 states, predominately across the Midwestern, Northeastern and Mid-Atlantic U.S.

Albertson’s Holdings LLC (“Parent”) is a holding company owned by Ultimate Parent.

Albertson’s LLC (“Albertson’s LLC”) operates 630 grocery stores under the banner names Albertsons, United Supermarkets, Market Street and Amigos as well as 11 distribution centers. The operations of Albertson’s LLC are located in 16 states, predominately across the Western and Southern U.S. Albertson’s LLC is a direct, wholly-owned subsidiary of Parent.

Saturn Acquisition Merger Sub, Inc. (“Merger Sub” and together with Ultimate Parent, Parent and Albertson’s LLC, the “Parent Entities”) was formed by Parent solely for the purpose of entering into the Agreement and Plan of Merger with Ultimate Parent, Parent, Albertson’s LLC and the Company, dated March 6, 2014 and amended on April 7, 2014 pursuant to Amendment No. 1 (“Amendment No. 1”) and on June 13, 2014 pursuant to Amendment No. 2 (“Amendment No. 2”) (as amended through the applicable dates of reference herein, the “Merger Agreement”), and consummating the transactions contemplated by the Merger Agreement. Merger Sub is wholly-owned by Parent.

Overview of the Transaction

On March 6, 2014, the Company entered into the Merger Agreement with the Parent Entities providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. The following will occur in connection with the Merger:

 

   

Each share of Company common stock issued and outstanding immediately prior to the closing of the Merger (other than (1) shares held by any Parent Entity or any of their affiliates, (2) treasury shares and

 

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(3) shares owned by stockholders who have perfected, and have not withdrawn a demand for or lost the right to, appraisal rights under the Delaware General Corporation Law (the “DGCL”)) will be converted into the right to receive (i) $32.50 in cash (the “Initial Cash Merger Consideration”), (ii) a pro-rata portion of any net proceeds with respect to certain sales of (x) Safeway’s 49% interest (the “Casa Ley Interest”) in Casa Ley, S.A. de C.V., a Mexico-based food and general merchandise retailer (“Casa Ley”) and (y) Safeway’s real-estate development subsidiaries Property Development Centers, LLC and PDC I, Inc., which will own certain shopping centers and related Safeway stores (“PDC”), (iii) a pro-rata portion of certain after-tax amounts received by the Company as dividends or distributions in respect of the Casa Ley Interest or that are paid from the operating earnings of PDC, (iv) if the closing of the Merger occurs after March 5, 2015, $0.005342 per day for each day from (and including) March 5, 2015 through (and including) the closing of the Merger (the “Additional Cash Merger Consideration”), and (v) if the sale of the Casa Ley Interest and/or the PDC assets are not fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, (x) one contingent value right relating to the sale of any remaining Casa Ley Interest and deferred consideration (a “Casa Ley CVR”) and/or (y) one contingent value right relating to the sale of any remaining PDC assets and deferred consideration (a “PDC CVR”). We refer to the amounts in (i), (ii), (iii), (iv) and (v) above as the “Per Share Merger Consideration” and the amounts in (i), (ii), (iii) and (iv) above as the “Per Share Cash Merger Consideration”). Any amounts to be received in connection with the Casa Ley CVR and/or the PDC CVR, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “Casa Ley Contingent Value Rights Agreement—Payment Not Certain” beginning on page 160 and “PDC Contingent Value Rights Agreement—Payment Not Certain” beginning on page 168. You are advised to approve and adopt the Merger Agreement only if you are willing to assume the risk that these contingent events may not occur and that there may be no cash consideration ultimately paid to you in excess of $32.50 per share of Company common stock. The Per Share Merger Consideration you will be entitled to receive will also be net of any required withholding taxes and will not include any interest. See “The Merger AgreementPer Share Merger Consideration” beginning on page 120 for additional information.

 

    The Company common stock will be delisted from the New York Stock Exchange (the “NYSE”), will not be publicly traded and will be deregistered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). See “The Merger—Delisting and Deregistration of the Company Common Stock” beginning on page 117 for additional information.

Stockholders Entitled to Vote

You may vote at the Annual Meeting if you owned any shares of Company common stock at the close of business on June 2, 2014, the record date for the Annual Meeting. On that date, there were 230,399,204 shares of Company common stock outstanding and entitled to vote at the Annual Meeting. You may cast one vote for each share of Company common stock that you owned on that date. See “The Annual Meeting—Voting” beginning on page 46 for additional information.

Vote Required to Approve and Adopt the Merger Agreement

To approve and adopt the Merger Agreement, the holders as of the record date of at least a majority of the outstanding shares of Company common stock must vote such shares “FOR” the proposal to approve and adopt the Merger Agreement. See “The Annual Meeting—Vote Required” beginning on page 42 for additional information.

Effects of the Merger Not Being Completed

If the Merger Agreement is not approved and adopted by our stockholders, or if the Merger is not completed for any other reason, our stockholders will not receive any payment for their Company common stock pursuant to

 

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the Merger Agreement. Instead, we will remain as a public company and shares of the Company common stock will continue to be registered under the Exchange Act and listed and traded on the NYSE. Under circumstances specified in the Merger Agreement, we may be required to pay Ultimate Parent a termination fee of up to $250 million or up to $50 million of the documented, reasonable out-of-pocket fees and expenses incurred by the Parent Entities in connection with the transactions contemplated by the Merger Agreement (depending on the nature of the termination). Alternatively, under circumstances specified in the Merger Agreement, we may be entitled to receive from the Parent Entities a termination fee of $400 million (depending on the nature of the termination). See “The Merger Agreement—Effect of Termination,” beginning on page 145.

Merger Consideration

If the Merger is completed, each share of Company common stock, other than as provided below, will be converted into the right to receive the Per Share Merger Consideration, net of any withholding taxes and without any interest. Shares of Company common stock held by any Parent Entity or any of their affiliates and treasury shares will be cancelled without payment of the Per Share Merger Consideration. Shares of Company common stock owned by stockholders who have perfected, and have not withdrawn a demand for or lost the right to, appraisal rights under the DGCL will be cancelled without payment of the Per Share Merger Consideration, and such stockholders will instead be entitled to appraisal rights under the DGCL.

The Merger Agreement provides that, at the effective time of the Merger, any and all rights with respect to the Company common stock pursuant to the Company’s Rights Agreement, dated September 17, 2013, by and between the Company and Computershare Trust Company, N.A., as Rights Agent (the “Company Rights Agreement”), to the extent outstanding at the effective time of the Merger, shall be automatically cancelled at the time the associated shares of Company common stock are cancelled (as specified in the Merger Agreement), no separate payment or distribution shall be made with respect thereto, and the holders thereof shall have no further rights in connection therewith or under the Company Rights Agreement. However, in connection with the Memorandum of Understanding (as defined under “—Litigation Relating to the Merger” beginning on page 21), the Company has, pursuant to the First Amendment to Rights Agreement, dated June 13, 2014, by and between the Company and Computershare Trust Company, N.A., as Rights Agent (the “Company Rights Agreement Amendment”), accelerated the expiration date of the Company Rights Agreement. As a result, the rights that were dividended with respect to the Company common stock pursuant to the Company Rights Agreement expired upon the expiration of the Company Rights Agreement on June 19, 2014 and no person has any rights pursuant to such rights or the Company Rights Agreement.

Prior to the effective time of the Merger, Ultimate Parent will designate a bank or trust company reasonably acceptable to the Company to act as the paying agent for the Per Share Merger Consideration (the “Paying Agent”). The Paying Agent will send written instructions for surrendering your certificates representing shares of Company common stock (if your shares of Company common stock are certificated) and obtaining the Per Share Cash Merger Consideration after we have completed the Merger. Do not return your stock certificates with your proxy card and do not forward your stock certificates to the Paying Agent prior to receipt of the written instructions. If you hold uncertificated shares of Company common stock (i.e. you hold your shares in book-entry form), you will automatically receive your Per Share Cash Merger Consideration as soon as practicable after the effective time of the Merger without any further action required on your part. See “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares, Performance Share Awards and Restricted Stock Units—Exchange and Payment Procedures” beginning on page 124 for additional information.

Casa Ley Contingent Value Rights Agreement

To the extent that the Casa Ley Interest is not completely sold by the closing of the Merger or there is any applicable deferred consideration regarding the sale of the Casa Ley Interest that has not been paid to the Company, each stockholder of the Company will receive a contingent value right to receive a pro-rata portion of any net proceeds with respect to sales of the Casa Ley Interest or any portion thereof received by the Company following the closing of the Merger. In that event, the Company, Ultimate Parent, a shareholder representative, which the

 

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Company will determine prior to the closing of the Merger and which will consist of a committee, or an entity controlled by a committee, comprised of three individuals who were members of the Board immediately prior to the closing of the Merger (the “Shareholder Representative”), and a rights agent (the “Rights Agent”), will enter into the Casa Ley CVR Agreement, which will be substantially in the form attached to Amendment No. 2 and included in this Proxy Statement as Annex C. The Casa Ley CVR Agreement will control the terms pursuant to which payments will be made to holders of the Casa Ley CVRs (“Casa Ley Holders”). The Casa Ley CVRs will not be marketable or listed on any securities exchange and, subject to limited exceptions, will not be transferable.

Casa Ley Holders will be entitled to the following payments upon the occurrence of any of the following four events:

 

  i. upon the consummation of a sale of less than all of the remaining Casa Ley Interest, a payment equal to certain net proceeds (if any) from such sale (including certain amounts received by the Company as dividends or distributions in respect of the Casa Ley Interest), after the payment of certain fees and expenses, and net of certain assumed taxes (based on a 39.25% rate);

 

  ii. upon the consummation of a sale of all of the remaining Casa Ley Interest, a payment equal to certain net proceeds (if any) from such sale (including certain amounts received by the Company as dividends or distributions in respect of the Casa Ley Interest), after the payment of certain fees and expenses, and net of certain assumed taxes (based on a 39.25% rate);

 

  iii. in the event that a sale of all of the remaining Casa Ley Interest has not been consummated as of the date which is the later of (A) the three year anniversary of the closing of the Merger and (B) if one or more Casa Ley sales agreements are executed prior to the three year anniversary of the closing of the Merger but the sale of the applicable Casa Ley Interest has not closed, sixty (60) days after the date all such Casa Ley sales agreements have either been terminated or all closings under such sales agreements have occurred (the “Casa Ley Sale Deadline”), a payment equal to the excess, if any, of (x) the fair market value (excluding any minority, liquidity or similar discount to the valuation of Casa Ley in its entirety), as determined either mutually by the Company and the Shareholder Representative or by an independent investment banking firm, of any portion of the Casa Ley Interest that remains unsold as of the Casa Ley Sale Deadline (as well as any unpaid proceeds arising from partial sales consummated prior to the Casa Ley Sale Deadline and certain dividends or distributions received by the Company from Casa Ley, to the extent not previously paid to the Casa Ley Holders) over (y) certain related fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the Casa Ley Interest; and

 

  iv. to the extent that any consideration pursuant to a partial or entire sale of the Casa Ley Interest includes any applicable deferred cash consideration, a payment equal to any portion of such consideration that is actually paid to the Company net of certain assumed taxes (based on a 39.25% rate).

The fees and expenses that reduce payments to the Casa Ley Holders will include broker’s fees, advisory fees, accountant’s or attorney’s fees, transfer taxes or similar amounts that are incurred by the Company, its subsidiaries, or the Shareholder Representative in connection with a sale of the Casa Ley Interest. In the event of a dispute between the Company and the Shareholder Representative regarding the calculation of payments to Casa Ley Holders, the Company and the Shareholder Representative will attempt to resolve any objections, and in the case of a sale of all of the remaining Casa Ley Interest or the occurrence of the Casa Ley Sale Deadline, items in dispute will be submitted to a jointly-selected neutral auditor if such items cannot be resolved by the Company and the Shareholder Representative.

Pursuant to the terms of the Casa Ley CVR Agreement, the Shareholder Representative will be responsible for conducting the sale process of the Casa Ley Interest. The Shareholder Representative will also have exclusive authority to make all decisions and to act on behalf of and as agent for, the Casa Ley Holders, and will have the sole and exclusive authority to enforce the rights of the Casa Ley Holders. The Casa Ley Holders will have limited recourse against the Shareholder Representative and will not have direct recourse against the Company or

 

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Ultimate Parent. The Company will indemnify the Shareholder Representative against all claims and losses incurred by it which arise out of or in connection with its duties under the Casa Ley CVR Agreement, unless due to gross negligence, bad faith or wilful or intentional misconduct of the Shareholder Representative.

In the event that a definitive sale agreement relating to all or less than all of the Casa Ley Interest is entered into prior to the Casa Ley Sale Deadline, such agreement will not, without the Company’s consent:

 

    require the Company to agree to any material operating restrictions applicable to the Company other than (i) customary confidentiality or employee non-solicitation provisions that survive for no more than two years from and after the closing of the Merger, and (ii) restrictions relating to Casa Ley, or, to the extent such restrictions are reasonable, the Company’s management, operation or oversight of the Casa Ley business;

 

    require the Company to agree to any recourse in excess of any escrow, holdback or similar amount after the closing of such agreement other than with respect to any customary indemnity obligations that are shared proportionately (based on their respective equity interests in Casa Ley being sold) among all of the participating Casa Ley shareholders for (A) any breaches by the Company or its subsidiaries of its covenants or agreements contained in such agreement or any customary representations in such agreement relating to organization, qualification, capitalization, title to assets, authority, no conflicts, brokers, taxes or employee benefits or (B) pre-closing taxes relating to Casa Ley;

 

    require the Company to retain any material excluded or retained liabilities relating to the Casa Ley Interest being sold or disposed of; or

 

    require the Company to sell the Casa Ley Interest for a price payable in consideration other than cash or that in the good faith judgment of the Shareholder Representative, would cause the net proceeds from such sale agreement to be less than zero.

Until payment of the proceeds from a sale of all of the remaining Casa Ley Interest or occurrence of the Casa Ley Sale Deadline, whichever is earlier, the Company also would be required to comply with certain covenants covering the operations of Casa Ley contained in the Casa Ley CVR Agreement. The Casa Ley CVR Agreement and each Casa Ley CVR will generally be terminated upon the one year anniversary of the later of (i) the payment of all proceeds from a partial or entire sale of the Casa Ley Interest and all deferred cash consideration, or (ii) the Casa Ley Sale Deadline. The Casa Ley CVR Agreement may also be terminated by written agreement of the Company and the Shareholder Representative.

There can be no assurance that any payment will be made under the Casa Ley CVRs, or regarding the amount or timing of any such payment. Any amounts to be received in connection with the Casa Ley CVRs, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “Casa Ley Contingent Value Rights Agreement—Payment Not Certain” beginning on page 160. The Casa Ley CVRs generally provide for a payment to the Casa Ley Holders following the sale of the Casa Ley Interest, if any, for amounts that generate proceeds in excess of certain costs, fees, expenses, indebtedness and other amounts. There are numerous risks and uncertainties associated with receiving payment under the Casa Ley CVRs, including the possibility that the Casa Ley Interest will not be sold for a value sufficient to generate a payment to Casa Ley Holders or will not be sold at all. If the entire Casa Ley Interest is not sold by the Casa Ley Sale Deadline, the Casa Ley CVR provides for a payment equal to the excess, if any, of (x) the fair market value (excluding any minority, liquidity or similar discount to the valuation of Casa Ley in its entirety), as determined either mutually by the Company and the Shareholder Representative or by an independent investment banking firm, of any portion of the Casa Ley Interest that remains unsold as of the Casa Ley Sale Deadline (as well as any unpaid proceeds arising from partial sales consummated prior to the Casa Ley Sale Deadline and certain dividends or distributions received by the Company from Casa Ley, to the extent not previously paid to the Casa Ley Holders) over (y) certain related fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the Casa Ley Interest. There is no guarantee of any such value and there can be no assurance that any such valuation will ultimately generate

 

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any cash proceeds to the Casa Ley Holders or when any such cash proceeds would be payable to the Casa Ley Holders. The Casa Ley CVRs are non-transferrable and will not have any voting or dividend rights, and the Casa Ley Holders will receive limited, if any, interest on proceeds payable to the Company in connection with the Casa Ley CVRs. The Casa Ley CVRs will not represent any equity or ownership interest in any Parent Entity, the Company, the Shareholder Representative or any of their respective affiliates or in any constituent company to the Merger. In addition, there is substantial uncertainty regarding the tax treatment of the Casa Ley CVRs. See “Proposal 1—The Merger—Material United States Federal Income Tax Consequences beginning on page 114 for a more complete description of the tax consequences of receiving Casa Ley CVRs.

See “Casa Ley Contingent Value Rights Agreement” beginning on page 154 for additional information.

PDC Structuring

Prior to the closing of the Merger, the Company and PDC will undertake certain structuring transactions intended to segregate the business and assets of PDC from those of the Company in preparation for the sale of PDC. In particular:

 

    the Company will contribute to PDC (to the extent not already owned by PDC) (i) the real estate relating to twelve (12) specified existing grocery stores, nine (9) specified grocery stores that are planned or under development, the shopping centers in which they are located, and certain other assets related to PDC’s property development business;

 

    PDC will transfer to the Company any assets owned by PDC to the extent such assets do not relate to PDC’s real estate development business;

 

    the Company and PDC will enter into a loan agreement that will provide for loans from the Company to PDC in an aggregate amount of up to $300 million (the “Company-PDC Loan Agreement”), which will be used by PDC in the ordinary course of its business (including the funding of development and redevelopment activity), and which (i) will be secured by mortgages on eleven (11) specified properties, (ii) will accrue interest at an annual rate of two percent (2%), which will be added to the outstanding principal balance, (iii) will mature upon the sale of all of PDC and (iv) are subject to mandatory prepayment requirements upon the sale of less than all of PDC’s assets; and

 

    the Company, as tenant, and PDC, as landlord, will enter into lease agreements (each, a “PDC Lease”) for 12 specified operating grocery stores and build-to-suit leases for nine specified to-be-developed grocery stores, each of which will be for an initial term of 20 years with extension options in favor of the Company for up to 80 additional years upon specified economic terms.

See “The Merger Agreement—Sales of Casa Ley and PDC—PDC Structuring” beginning on page 150 and “Company-PDC Loan Agreement” beginning on page 169 for additional information.

PDC Contingent Value Rights Agreement

To the extent that the PDC assets are not completely sold by the closing of the Merger or there is any applicable deferred consideration regarding any pre-closing sales of the PDC assets that has not been paid to the Company, each stockholder of the Company will receive a contingent value right to receive a pro-rata portion of any net proceeds with respect to sales of the PDC assets or any portion thereof received by the Company following the closing of the Merger. In that event, the Company, Ultimate Parent, the Shareholder Representative and the Rights Agent will enter into the PDC CVR Agreement, which will be substantially in the form attached to Amendment No. 2 to the Merger Agreement included in this Proxy Statement as Annex C. The PDC CVR Agreement will control the terms pursuant to which payments will be made to holders of the PDC CVRs (“PDC Holders”). The PDC CVRs will not be marketable or listed on any securities exchange and, subject to limited exceptions, will not be transferrable.

 

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PDC Holders will be entitled to the following payments upon the occurrence of any of the following four events:

 

  i. upon the consummation of a sale of less than all of the remaining PDC assets, a payment equal to certain net proceeds (if any) from such sale (including certain amounts received by the Company as dividends or distributions paid from the operating earnings of PDC), after the payment of certain fees, expenses and debt repayments, and net of certain assumed taxes (based on a 39.25% rate);

 

  ii. upon the consummation of a sale of all of the remaining PDC assets, a payment equal to certain net proceeds (if any) from such sale (including certain amounts received by the Company as dividends or distributions paid from the operating earnings of PDC), after the payment of certain fees, expenses and debt repayments, and net of certain assumed taxes (based on a 39.25% rate);

 

  iii. in the event that a sale of all of the remaining PDC assets has not been consummated as of the date which is the later of (A) the two year anniversary of the closing of the Merger and (B) if one or more PDC sales agreements are executed prior to the two year anniversary of the closing of the Merger but the sale of the applicable PDC asset has not closed, 60 days after the date all such PDC sales agreements have either been terminated or all closings under such sales agreements have occurred (the “PDC Sale Deadline”), a payment equal to the excess, if any, of (x) the fair market value of the PDC assets that remain unsold as of the PDC Sale Deadline, as determined either mutually by the Company and the Shareholder Representative or by a qualified real estate appraiser (as well as any unpaid proceeds arising from partial sales consummated prior to the PDC Sale Deadline and certain dividends or distributions received by the Company from the operating earnings of PDC, to the extent not previously paid to the PDC Holders) over (y) certain related fees, expenses, debt repayments and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the PDC assets; and

 

  iv. to the extent that any consideration pursuant to a partial or entire sale of PDC includes any applicable deferred cash consideration, a payment equal to any portion of such consideration that is actually paid to the Company net of certain assumed taxes (based on a 39.25% rate).

The fees and expenses that reduce payments to the PDC Holders will include broker’s fees, advisory fees, accountant’s or attorney’s fees, transfer taxes or similar amounts that are incurred by the Company, its subsidiaries, or the Shareholder Representative in connection with the sale of PDC, as well as severance costs incurred by the Company or PDC within one month of a partial or entire sale of PDC and indebtedness of PDC pursuant to the Company-PDC Loan or in respect of PDC’s third-party indebtedness. In the event of a dispute between the Company and the Shareholder Representative regarding the calculation of payments to PDC Holders, the Company and the Shareholder Representative will attempt to resolve any objections, and in the case of a sale of all of the remaining PDC assets or occurrence of the PDC Sale Deadline, items in dispute will be submitted to a jointly-selected neutral auditor if such items cannot be resolved by the Company and the Shareholder Representative.

Pursuant to the terms of the PDC CVR Agreement, the Shareholder Representative will be responsible for conducting the sale process of PDC. The Shareholder Representative will also have exclusive authority to make all decisions and to act on behalf of and as agent for, the PDC Holders, and will have the sole and exclusive authority to enforce the rights of the PDC Holders. The PDC Holders will have limited recourse against the Shareholder Representative and will not have direct recourse against the Company or Ultimate Parent. The Company will indemnify the Shareholder Representative against all claims and losses incurred by it which arise out of or in connection with its duties under the PDC CVR Agreement, unless due to gross negligence, bad faith or wilful or intentional misconduct of the Shareholder Representative.

In the event that a definitive sale agreement relating to a sale of all or less than all of PDC is entered into prior to the PDC Sale Deadline, such agreement will not, without the Company’s consent:

 

   

require the Company to agree to any material operating restrictions applicable to the Company other than (i) customary confidentiality or employee non-solicitation provisions that survive for no more than

 

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two years from and after the closing of the Merger, (ii) restrictions relating to PDC or the Company’s management, operation or oversight of PDC, and (iii) restrictions contained in the lease agreements for each of the existing stores designated as “Contributed Stores” under the Merger Agreement;

 

    require the Company to agree to any recourse in excess of any escrow, holdback or similar amount after the closing of such agreement other than with respect to any customary indemnity obligations for (A) any breaches by the Company or its subsidiaries of its covenants or agreements contained in such agreement or any customary representations in such agreement relating to organization, qualification, capitalization, title to assets, authority, no conflicts, brokers, taxes, environmental matters or employee benefits or (B) pre-closing taxes relating to PDC;

 

    require the Company to retain any material excluded or retained liabilities relating to the securities or assets of PDC being sold or disposed of; or

 

    require the Company to sell PDC for a price payable in consideration other than cash or that in the good faith judgment of the Shareholder Representative, would cause the net proceeds from such sale agreement to be less than zero.

Until payment of the proceeds from a sale of all of the remaining PDC assets or occurrence of the PDC Sale Deadline, whichever is earlier, the Company also would be required to comply with certain covenants covering the operations of PDC contained in the PDC CVR Agreement. The PDC CVR Agreement and each PDC CVR will generally be terminated upon the one year anniversary of the later of (i) the payment of all proceeds from a partial or entire sale of PDC and all deferred cash consideration, or (ii) the PDC Sale Deadline. The PDC CVR Agreement may also be terminated by written agreement of the Company and the Shareholder Representative.

There can be no assurance that any payment will be made under the PDC CVRs, or regarding the amount or timing of any such payment. Any amounts to be received in connection with the PDC CVRs, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “PDC Contingent Value Rights Agreement—Payment Not Certain” beginning on page 168. The PDC CVRs generally provide for a payment to the PDC Holders following the sale of the PDC assets, if any, for amounts that generate proceeds in excess of certain costs, fees, expenses, indebtedness and other amounts. There are numerous risks and uncertainties associated with receiving payment under the PDC CVRs, including the possibility that PDC will not be sold for a value sufficient to generate a payment to PDC Holders or will not be sold at all. If all of the remaining PDC assets have not sold by the PDC Sale Deadline, the PDC CVR provides for a payment equal to the excess, if any, of (x) the fair market value of the PDC assets that remain unsold as of the PDC Sale Deadline, as determined either mutually by the Company and the Shareholder Representative or by a qualified real estate appraiser (as well as any unpaid proceeds arising from partial sales consummated prior to the PDC Sale Deadline and certain dividends or distributions received by the Company from the operating earnings of PDC, to the extent not previously paid to the PDC Holders), over (y) certain related fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the PDC assets. There is no guarantee of any such value and there can be no assurance that any such valuation will ultimately generate any cash proceeds to the PDC Holders or when any such cash proceeds would be payable to the PDC Holders. The PDC CVRs are non-transferrable and will not have any voting or dividend rights, and the PDC Holders will receive limited, if any, interest on proceeds payable to the Company in connection with the PDC CVRs. The PDC CVRs will not represent any equity or ownership interest in any Parent Entity, the Company, the Shareholder Representative or any of their respective affiliates or in any constituent company to the Merger. In addition, there is substantial uncertainty regarding the tax treatment of the PDC CVRs. See “Proposal 1—The Merger—Material United States Federal Income Tax Consequences” beginning on page 114 for a more complete description of the tax consequences of receiving PDC CVRs.

See “PDC Contingent Value Rights Agreement” beginning on page 161 for additional information.

 

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Treatment of Options, Restricted Shares, Performance Share Awards and Restricted Stock Units

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each outstanding, unexpired and unexercised option to purchase shares of Company common stock (each, a “Company Option”), that was granted under any equity incentive plan of the Company, including the 1999 Amended and Restated Equity Participation Plan, the 2007 Equity and Incentive Award Plan and the 2011 Equity and Incentive Award Plan or any other plan, agreement or arrangement (collectively, the “Company Equity Incentive Plans”), whether or not then exercisable or vested, shall be accelerated, vested and cancelled and converted into the right to receive an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the total number of shares of Company common stock subject to such Company Option as of immediately prior to the effective time of the Merger and (B) the excess, if any, of the Per Share Cash Merger Consideration over the exercise price per share of Company common stock (the “Option Price”) of such Company Option (the “Option Payment”). In addition, if the sale of the Casa Ley Interest and/or the PDC assets, as applicable, are not fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, then each Company Option shall be eligible to receive one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each share of Company common stock subject to such cancelled Company Option that has an Option Price (as defined below in “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares, Performance Share Awards and Restricted Stock Units” beginning on page 122) less than the Per Share Cash Merger Consideration. Each Company Option with an Option Price (as of immediately prior to the effective time) that equals or exceeds the Per Share Cash Merger Consideration shall, immediately prior to the effective time, be cancelled without the payment of consideration.

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each restricted share of Company common stock that is outstanding and that was granted pursuant to any Company Equity Incentive Plan whether or not then exercisable or vested, shall automatically vest and all restrictions thereon shall lapse, and shall be cancelled and converted into the right to receive the Per Share Merger Consideration.

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each outstanding performance share award covering shares of Company common stock (each a “Performance Share Award”) that was granted under any Company Equity Incentive Plan will vest at the target levels specified for each such award and will be cancelled in exchange for (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Company common stock subject to such Performance Share Award (after taking into account any vesting that occurs in connection with the preceding sentence) and (B) the Per Share Cash Merger Consideration and (ii) in the event that the sale of the Casa Ley Interest and/or the PDC assets, as applicable, have not been fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each vested share of Company common stock subject to such Performance Share Award.

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each outstanding restricted stock unit covering shares of Company common stock (each a “Restricted Stock Unit”), that was granted under any Company Equity Incentive Plan, whether or not then vested, shall be accelerated, vested and cancelled in exchange for the right to receive (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Company common stock subject to such Restricted Stock Unit and (B) the Per Share Cash Merger Consideration and (ii) in the event that the sale of the Casa Ley Interest and/or the PDC assets, as applicable, have not been fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each vested share of Company common stock subject to such Restricted Stock Unit.

 

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As of the effective time of the Merger, all Company Equity Incentive Plans and all Company employee stock purchase plans shall be terminated and no further Company Options, restricted shares of Company common stock, Performance Share Awards or Restricted Stock Units shall be granted thereunder.

The Merger Agreement provides that, immediately prior to the effective time of the Merger, all shares of Company common stock credited in the “stock credit accounts” under the Company’s Deferred Compensation Plan for Directors (“DCP”) and the Deferred Compensation Plan for Directors II (“DCPII”) shall be cancelled and, in exchange therefor, such accounts shall be credited with (i) an amount in cash equal to the product of (A) the number of shares of Company common stock credited to each such “stock credit account” and (B) the Per Share Cash Merger Consideration and (ii) in the event that the sale of the Casa Ley Interest and/or the PDC assets, as applicable, have not been fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each share of Company common stock credited to such “stock credit account.” All amounts credited under the DCP and the DCPII shall be continue to be held and paid at such times and in accordance with the terms of the plans and any applicable deferral and distribution elections made under such plans.

Effect on Blackhawk Distribution

The Merger Agreement did not alter the Company’s previously announced plan to distribute to its stockholders on April 14, 2014 the remaining 37.8 million shares of Class B common stock of Blackhawk Network Holdings, Inc. (“Blackhawk”) that the Company owned (the “Blackhawk Distribution”). The Blackhawk Distribution was not dependent upon the closing of the Merger, and was undertaken for independent business reasons. If the Merger is not completed, and certain other conditions are met, the Company intends to take the position that the Blackhawk Distribution should qualify as tax-free to the Company and its stockholders for U.S. federal income tax purposes. Under certain limited circumstances, the Parent Entities have agreed to indemnify the Company for certain potential taxes arising from the Blackhawk Distribution in the event the Merger is not consummated. For additional information see “The Merger AgreementBlackhawk Distribution and Tax Indemnity” beginning on page 152 and “Blackhawk Distribution” beginning on page 171.

Recommendation of the Board; Reasons for Recommending the Approval and Adoption of the Merger Agreement

The Board, after careful consideration, unanimously recommends that our stockholders vote:

 

    “FOR” the proposal to approve and adopt the Merger Agreement;

 

    “FOR” the non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the completion of the Merger (the “Merger-related compensation proposal”); and

 

    “FOR” the proposal to approve the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement.

The Board unanimously determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are fair to, advisable and in the best interests of the Company and its stockholders. For a discussion of the material factors considered by the Board in determining to recommend the approval and adoption of the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement, see “Proposal 1—The Merger—Recommendation of the Board; Reasons for Recommending the Approval and Adoption of the Merger Agreement” beginning on page 71 for additional information.

 

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Opinion of Financial Advisors to the Board

Goldman, Sachs & Co. (“Goldman Sachs”) delivered its opinion to the Board that, as of March 6, 2014 and based upon and subject to the factors and assumptions set forth therein, the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to the holders of shares of Company common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders. On June 13, 2014, Goldman Sachs delivered a letter to the Board confirming that, based upon and subject to the factors and assumptions stated therein, had Goldman Sachs issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed.

Greenhill & Co., LLC (“Greenhill”) also delivered its opinion to the Board that, as of March 6, 2014 and based upon and subject to the factors and assumptions set forth therein, the sum of (i) the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be received by the holders of shares of Company common stock pursuant to the Merger Agreement and (ii) the separate per share distribution to the holders of shares of Company common stock in the Blackhawk Distribution was fair, from a financial point of view, to such holders. On June 13, 2014, Greenhill delivered a letter to the Board confirming that, based upon and subject to the factors and assumptions stated therein, had Greenhill issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed.

The full text of the written opinion of Goldman Sachs, dated March 6, 2014, and the confirmatory letter of Goldman Sachs, dated June 13, 2014, which set forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion and such confirmatory letter, are attached to this Proxy Statement as Annex E. The full text of the written opinion of Greenhill, dated March 6, 2014, and the confirmatory letter of Greenhill, dated June 13, 2014, which set forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion and such confirmatory letter, are attached to this Proxy Statement as Annex F. The summaries of the opinions and the confirmatory letters of Goldman Sachs and Greenhill are qualified in their entirety by reference to the full text of the opinions and confirmatory letters. Goldman Sachs and Greenhill provided their opinions and confirmatory letters for the information and assistance of the Board in connection with the Board’s consideration of the Merger. The opinions and confirmatory letters are not intended to be and do not constitute a recommendation as to how any holder of the Company common stock should vote with respect to the approval and adoption of the Merger Agreement or any other matter. Pursuant to an engagement letter between Safeway and Goldman Sachs, Safeway has agreed to pay Goldman Sachs an estimated transaction fee of $37.0 million, $2.0 million of which became payable upon execution of the Merger Agreement, and the remainder of which is payable upon consummation of the transactions contemplated by the Merger Agreement. Pursuant to an engagement letter between Safeway and Greenhill, Safeway paid Greenhill total fees of $2.4 million upon delivery of Greenhill’s opinion and confirmatory letters.

See “Proposal 1—The Merger—Opinion of Goldman, Sachs & Co., Financial Advisor to the Board” beginning on page 76 and “Proposal 1—The Merger—Opinion of Greenhill & Co., LLC, Financial Advisor to the Board” beginning on page 89 for additional information.

Financing of the Merger

Equity Financing

Ultimate Parent has entered into a letter agreement, dated March 6, 2014, which we refer to as the equity commitment letter, with Cerberus Institutional Partners V, L.P., Jubilee Saturn ABS LLC, K-Saturn, LLC, Kimco Realty Services, Inc. and ColFin Safe Holdings, LLC, which we refer to as the equity investors in their capacity as equity investors, and with Sei, Inc. and Colony Financial, Inc., which together with Cerberus Institutional Partners V, L.P., K-Saturn, LLC and Kimco Realty Services, Inc. we refer to as sponsors in their

 

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capacity as sponsors, and with Cerberus, pursuant to which the equity investors have committed, on a several (not joint and several) basis, to purchase, and/or to cause the purchase through one or more entities formed for the purpose of investing in Ultimate Parent, of equity securities of Ultimate Parent at the closing of the Merger, for an amount equal to $1,250 million in the aggregate, which we refer to collectively as the equity financing. Each equity investor may assign a portion of its equity commitment to affiliated investment funds, but any such assignment shall not relieve such equity investor of its obligations to fund its equity commitment except to the extent its affiliated investment fund actually fulfills the equity commitment. The equity investors’ obligations to fund the equity financing contemplated by the equity commitments are generally subject to (i) the satisfaction or waiver of each of the conditions to the Parent Entities’ obligations to consummate the transactions contemplated by the Merger Agreement, (ii) the substantially contemporaneous funding of the debt financing pursuant to the terms and conditions of the debt commitment letters described below or any alternative financing that Parent and Merger Sub accept from alternative sources pursuant to and in accordance with the Merger Agreement, (iii) the prior or substantially contemporaneous funding by each other equity investor (or any permitted replacement investor) of its commitment and (iv) the substantially contemporaneous closing of the Merger. In addition, the Company was made a third party beneficiary to certain commitment letters from investment funds affiliated with K-Saturn, LLC and Cerberus Institutional Partners V, L.P. supporting their respective obligations under the equity commitment letter on terms and conditions substantially similar to the equity commitment letter. For additional information on the equity financing see “Proposal 1—The MergerFinancing of the Merger—Equity Financing” beginning on page 105.

Limited Guarantee

Pursuant to a limited guarantee, dated March 6, 2014, which we refer to as the limited guarantee, delivered by the sponsors in favor of the Company, each sponsor has agreed to, severally but not jointly, guarantee the due and punctual payment of such sponsor’s agreed upon percentage (which aggregate to 100% with respect to all sponsors) of the payment obligations of the Parent Entities under the Merger Agreement to pay the Parent Termination Fee and certain expense reimbursement and indemnification obligations of the Parent Entities to the Company if, as and when required to be paid by the Parent Entities pursuant to the Merger Agreement. See “The Merger Agreement—Effect of Termination” beginning on page 145. For additional information on the limited guarantee see “Proposal 1—The Merger—Financing of the Merger—Limited Guarantee” beginning on page 106.

Debt Financing

Parent obtained a debt commitment letter pursuant to which, and subject to the terms and conditions set forth therein, each of Bank of America, N.A., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc., Citibank, N.A., Citicorp USA, Inc., Citicorp North America, Inc., Credit Suisse AG, Cayman Islands Branch, Credit Suisse Securities (USA) LLC, Morgan Stanley Senior Funding, Inc., Barclays Bank PLC, Deutsche Bank AG New York Branch, Deutsche Bank AG Cayman Islands Branch, Deutsche Bank Securities Inc., PNC Bank, National Association, PNC Capital Markets LLC, US Bank National Association, U.S. Bancorp Investments, Inc., SunTrust Robinson Humphrey, Inc. and SunTrust Bank (in each case, together with certain affiliates) (the “Initial Lenders”) committed severally to provide Parent specified percentages (aggregating 100%) of a (i) $2,750,000,000 asset based revolving loan facility and (ii) $6,700,000,000 term loan facility. In addition, to the extent Parent does not receive up to $1,625,000,000 of gross proceeds from the issuance of senior secured notes on the date of the closing of the Merger, certain Initial Lenders agreed, subject to the terms and conditions set forth therein, to provide senior secured loans for such amount. The Initial Lenders’ commitments to provide the debt financing are subject to certain conditions, including, among other things, the funding of the Parent Entities’ equity contribution and receipt of required information. The Initial Lenders’ commitments to provide the debt financing are not conditioned upon a successful syndication of any of the facilities with other institutions. In connection with the financing, immediately following closing of the Merger, the Parent Entities also contemplate causing the Company and certain of its subsidiaries to enter into an asset purchase agreement (the “EDS APA”) with NAI, pursuant to which NAI will acquire for $659,000,000 the Company’s Eastern division. Although the Parent Entities are relying on the funding of Parent’s financing

 

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commitments to be able to close the Merger, the consummation of the Parent’s financing is not a condition to the closing of the Merger in the Merger Agreement. See “Proposal 1—The Merger—Financing of the Merger—Debt Financing” beginning on page  106 for additional information.

Interests of the Company’s Directors and Executive Officers in the Merger

In considering the recommendation of the Board, you should be aware that certain of our executive officers and directors have interests in the Merger that may be different from, or in addition to, your interests as a stockholder. These interests include, among others:

 

    the cancellation of outstanding Company Options, whether or not vested, immediately prior to the effective time of the Merger in exchange for the Option Payments payable at the effective time of the Merger as well as the right to receive Casa Ley CVRs and/or PDC CVRs (as applicable) in respect of shares of Company common stock subject to such cancelled Company Options that have an Option Price (as defined below in “The Merger AgreementTreatment of Common Stock, Options, Restricted Shares, Performance Share Awards and Restricted Stock Units” beginning on page 123) less than the Per Share Cash Merger Consideration;

 

    the vesting of Performance Share Awards at the target levels specified for such awards, and the cancellation of such Performance Share Awards in exchange for the right to receive an amount in cash equal to the product of the number of vested shares of Company common stock subject to such Performance Share Awards and the Per Share Cash Merger Consideration, as well as the right to receive Casa Ley CVRs and/or PDC CVRs (as applicable) in respect of vested shares of Company common stock subject to such cancelled Performance Share Awards;

 

    the accelerated vesting of all outstanding Restricted Stock Units and the cancellation of such Restricted Stock Units in exchange for the right to receive an amount in cash equal to the product of the number of vested shares of Company common stock subject to such Restricted Stock Units and the Per Share Cash Merger Consideration, as well as the right to receive Casa Ley CVRs and/or PDC CVRs (as applicable) in respect of vested shares of Company common stock subject to such cancelled Restricted Stock Units;

 

    the acceleration of vesting of all outstanding shares of restricted Company common stock and the cancellation of such shares of restricted Company common stock in exchange for the right to receive the Per Share Merger Consideration;

 

    the cancellation of all shares of Company common stock credited in the “stock credit accounts” under the DCP and DCPII in exchange for crediting such accounts with an amount in cash equal to the product of the number of shares of Company common stock credited to such “stock credit accounts” and the Per Share Cash Merger Consideration, as well as the right to receive Casa Ley CVRs and/or PDC CVRs (as applicable) in respect of shares of Company common stock credited to such “stock credit accounts;”

 

    a retention bonus plan for certain key employees of the Company, pursuant to which such individuals are eligible to earn two retention bonuses (denominated at a percentage of base salary), the first of which is payable on or within thirty days following March 6, 2015 and the second of which is payable on or within thirty days following March 6, 2016, in each case, subject to the individual’s continued employment with the Company through the applicable retention date; and

 

    continued indemnification and liability insurance for directors and officers following the closing of the Merger.

See “Proposal 1—The Merger—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 110 for additional information.

 

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Conditions to the Merger

The respective obligations of the Company and the Parent Entities to consummate the Merger are subject to the satisfaction or waiver of certain customary conditions, including the approval and adoption of the Merger Agreement by the holders of shares of Company common stock, the absence of any law or any temporary restraining order, injunction or other order of a governmental entity that makes illegal or prohibits consummation of the Merger, the expiration or termination of the waiting period applicable to the closing of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), the accuracy of the representations and warranties of the parties to the Merger Agreement and the compliance by the parties to the Merger Agreement with their respective obligations under the Merger Agreement. The obligation of the Parent Entities to consummate the Merger is also subject to the absence of a Company Material Adverse Effect, as described under “The Merger Agreement—Representations and Warranties” beginning on page 125. For a more detailed description of these conditions, see “The Merger Agreement—Conditions to the Merger” beginning on page  142.

Regulatory Approvals

The Merger cannot be completed until the Company and the Parent Entities each file a notification and report form under the HSR Act, and the applicable waiting period has expired or been terminated. The Company and the Parent Entities filed the notification and report forms under the HSR Act with the Federal Trade Commission (the “FTC”) and the Antitrust Division of the Department of Justice (the “DOJ”) on March 11, 2014. On April 10, 2014, the Company and the Parent Entities each received a request for additional information and documentary materials from the FTC with respect to the Merger. The waiting period will not begin until both the Company and the Parent Entities are in substantial compliance with such request. The Company and the Parent Entities have been cooperating fully and completely and producing documents in connection with the FTC’s investigation of the Merger. See “Proposal 1—The Merger—Regulatory Matters” beginning on page 113 and “The Merger Agreement—Conditions to the Merger” beginning on page 142.

Solicitation of Acquisition Proposals

The Merger Agreement provides that until 11:59 p.m., New York City time, on March 27, 2014, we were permitted to initiate, solicit and encourage any inquiries, or the making of any proposals or offers that constitute acquisition proposals (as described in “The Merger Agreement—Solicitation of Transactions—Go-Shop Period” beginning on page 136) from third parties and to engage in, enter into or otherwise participate in any discussions or negotiations with any persons or groups of persons with respect to any acquisition proposals. In addition, in the event that any person or group of persons (which we refer to as an “Excluded Party”) submitted a written acquisition proposal prior to 12:00 a.m. on March 28, 2014 that the Board determined in good faith after consultation with its financial advisors and outside legal counsel constituted or could reasonably have been expected to lead to a superior proposal (as described in “The Merger Agreement—Solicitation of Transactions—Termination for Superior Proposals and Company Adverse Recommendation Change” beginning on page 137), then the Company and its subsidiaries and representatives could have continued to solicit and engage with such Excluded Party until 11:59 p.m. on April 12, 2014. None of the parties contacted by the Company during the go-shop period notified Safeway prior to the March 28, 2014 deadline that they would be interested in pursuing an alternative transaction under the Merger Agreement. See “Proposal 1—The Merger—Background of the Merger” beginning on page 53 for additional information.

From and after 12:00 a.m., New York City time, on March 28, 2014, which we refer to as the no-shop period start date, and until the effective time of the Merger or, if earlier, the termination of the Merger Agreement, we are not permitted to initiate, solicit, knowingly encourage or facilitate any acquisition proposals or engage in or otherwise participate in any discussions or negotiations regarding, or provide any non-public information concerning the Company and its subsidiaries to, any person that is seeking to make, or has made, an acquisition proposal or enter into any letter of intent, memorandum of understanding, acquisition agreement, merger agreement or similar definitive agreement (other than an acceptable confidentiality agreement) with respect to any acquisition proposal. See “The Merger Agreement—Solicitation of Transactions—No Solicitation or Negotiation” beginning on page 136.

 

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Notwithstanding these restrictions, under certain circumstances, from and after the no-shop period start date, and prior to the time our stockholders approve and adopt the Merger Agreement or the Merger Agreement is terminated, we or any of our subsidiaries or representatives may (i) furnish to any person making an acquisition proposal information (including non-public information) pursuant to an acceptable confidentiality agreement (provided that the Company reasonably promptly and, in any event, within forty-eight (48) hours, makes such information available to Ultimate Parent if not previously made available to Ultimate Parent) and (ii) engage or participate in discussions or negotiations with any person making an acquisition proposal (as described in “The Merger Agreement—Solicitation of Transactions—Permitted Conduct Following No-Shop Period Start Date” beginning on page 137), in each case, if the Company receives a written acquisition proposal from any person that did not result from a breach by the Company of its obligations relating to the solicitation (or prohibition thereof) of acquisition proposals and the Board has determined in good faith (after consultation with its financial advisors and outside counsel) that such acquisition proposal either constitutes a superior proposal or would reasonably be expected to result in a superior proposal and that the failure to take such action would be inconsistent with the Board’s fiduciary duties under applicable law. At any time before the Merger Agreement is approved and adopted by our stockholders, if the Board determines in good faith (after consultation with its financial advisors and outside counsel) that an acquisition proposal is a superior proposal and that the failure to terminate the Merger Agreement and accept such superior proposal would be inconsistent with the Board’s fiduciary duties under applicable law, we may terminate the Merger Agreement and enter into an agreement with respect to such superior proposal, so long as we comply with the solicitation limitations and other terms of the Merger Agreement, including paying a termination fee to Ultimate Parent (see “The Merger Agreement—Solicitation of Transactions—Termination for Superior Proposals and Company Adverse Recommendation Change” beginning on page 137 and “The Merger Agreement—Termination” beginning on page 144).

Termination of the Merger Agreement

The Company and Ultimate Parent may, by mutual written consent, terminate the Merger Agreement and abandon the Merger at any time prior to the effective time of the Merger, whether before or after the approval and adoption of the Merger Agreement by the Company’s stockholders.

The Merger Agreement may also be terminated and the Merger abandoned at any time prior to the effective time of the Merger as follows:

by either Ultimate Parent or the Company, by written notice to the other party, if:

 

    the Merger has not been consummated on or prior to March 5, 2015 (the “Initial End Date”), provided that (i) if (A) all of the conditions to the closing of the Merger, other than the receipt of certain regulatory or governmental approvals, have been satisfied or are capable of being satisfied at the Initial End Date, (B) none of the Parent Entities is in breach of any of its representations, warranties, covenants or agreements under the Merger Agreement as though made on and as of the Initial End Date (except to the extent expressly made as of an earlier date, in which case as of such date, other than with respect to the ability to satisfy the Parent Entities’ financing conditions which shall be measured as of the Initial End Date), (C) the conditions to extending Parent’s financing (referred to and defined as “Financing Extension Conditions” in the Merger Agreement, and including Parent’s issuance of certain secured notes or incurrence of certain bridge loans) are satisfied, and (D) Parent’s equity commitment letters are in full force and effect and will remain so through the Final End Date (as defined below), then the Initial End Date may, in Ultimate Parent’s sole discretion, be extended to June 5, 2015 (the “Final End Date”) and (ii) the party seeking to terminate the Merger Agreement is not in material breach of its obligations under the Merger Agreement in any manner that caused or resulted in the failure to consummate the Merger on or before the Initial End Date or, if such date is extended by Ultimate Parent, the Final End Date;

 

   

a court has issued an injunction or similar order permanently restraining, enjoining or otherwise prohibiting the closing of the Merger and such injunction shall have become final and non-appealable

 

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(but this right to terminate will not be available to a party that did not use appropriate efforts as required by the Merger Agreement to prevent, oppose and remove such injunction); or

 

    the required approval of the Company’s stockholders shall not have been obtained at the stockholders meeting duly convened therefor or any adjournment thereof;

by Ultimate Parent, by written notice to the Company, if:

 

    at any time before the Company’s stockholders approve and adopt the Merger Agreement, (i) the Board shall have made a Company adverse recommendation change (as described in “The Merger Agreement—Solicitation of Transactions—Termination for Superior Proposals and Company Adverse Recommendation Change” beginning on page 137) or (ii) the Company enters into an alternative acquisition agreement (as described in the same section beginning on page 137); or

 

    the Company breaches any of its representations or warranties or fails to perform any of its covenants or agreements set forth in the Merger Agreement, which breach or failure to perform (i) would give rise to the failure of the Parent Entities’ conditions to the closing of the Merger based on the Company’s breach of its representations and warranties or covenants and agreements and (ii) is not curable, or if curable, is not cured prior to the earlier of (A) the 30th day after written notice thereof is given by Ultimate Parent to the Company or (B) the Initial End Date, or, if the Initial End Date is extended, the Final End Date (but Ultimate Parent shall not have this right to terminate if any of the Parent Entities is then in breach of any representations, warranties, covenants or other agreements that would result in the conditions to the Company’s obligation to effect the Merger not being satisfied).

by the Company, by written notice to Ultimate Parent, if:

 

    at any time before the Company’s stockholders approve and adopt the Merger Agreement, in order to enter into an alternative acquisition agreement that constitutes a superior proposal, if (i) the Board, after satisfying all of the requirements set forth in “The Merger Agreement—Solicitation of Transactions” beginning on page 136, authorizes the Company to enter into such alternative acquisition agreement and (ii) at substantially the same time, the Company enters into the alternative acquisition agreement and pays Ultimate Parent any fees required to be paid pursuant to “The Merger Agreement—Effect of Termination” (but the Company shall not have the right to terminate if it has not complied in all material respects with the requirements in “The Merger Agreement—Solicitation of Transactions” beginning on page 136 with respect to the superior proposal);

 

    any of the Parent Entities breach any of their representations or warranties or fail to perform any of their covenants or agreements set forth in the Merger Agreement, which breach or failure to perform (i) would give rise to the failure of the Company’s condition to the closing of the Merger based on the Parent Entities’ breach of their representations and warranties or covenants and agreements and (ii) is not curable, or if curable, is not cured prior to the earlier of (A) the 30th day after written notice thereof is given by the Company to Ultimate Parent or (B) the Initial End Date (or, if the Initial End Date is extended, the Final End Date) (but the Company shall not have this right to terminate if the Company is then in breach of any representations, warranties, covenants or other agreements that would result in the conditions to the Parent Entities’ obligations to effect the Merger not being satisfied); and

 

   

at any time prior to the closing of the Merger and (if prior to the Initial End Date) after the expiration of the Marketing Period (as defined in “The Merger Agreement—Parent’s Financing Covenant; Company’s Financial Cooperation Covenant—Marketing Period” beginning on page 131) (i) all of the conditions to the Parent Entities’ obligations to effect the Merger (other than conditions which by their nature are to be satisfied by actions taken at the closing of the Merger) have been satisfied or waived, and the Company has complied in all material respects with its obligations under “The Merger Agreement—Parent’s Financing Covenant; Company’s Financial Cooperation Covenant” beginning on page 131, (ii) the Company has irrevocably notified Ultimate Parent in writing that the Company is ready, willing and able to consummate the closing of the Merger, and (iii) the Parent Entities fail to

 

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consummate the closing of the Merger and the transactions contemplated by the Merger Agreement within five (5) business days following such notice.

Termination Fees and Reimbursement of Expenses

If the Merger Agreement is terminated in certain circumstances described under “The Merger Agreement—Effect of Termination” beginning on page 145:

 

    the Company may be obligated to pay Ultimate Parent a termination fee of up to $250 million; in addition, if the Company’s stockholders do not vote to approve and adopt the Merger Agreement, then in certain circumstances the Company may be required to reimburse up to $50 million of the Parent Entities’ documented, reasonable out-of-pocket expenses in connection with the Merger Agreement, with any such expense reimbursement credited toward any termination fee that may become payable; or

 

    the Parent Entities may be obligated to pay the Company a termination fee of $400 million.

Remedies

Subject to certain exceptions (as described in “The Merger Agreement—Effect of Termination” beginning on page 145) and the right to specific performance as described below, Ultimate Parent’s and the Company’s right to receive payment of the applicable termination fee, reimbursement of expenses (if applicable) and certain costs of enforcement recoverable under the Merger Agreement will be the sole and exclusive remedy of such parties and any of their respective affiliates against the other party and its subsidiaries and any of their respective former, current or future executive officers, directors, partners, stockholders, managers, members or affiliates for any loss suffered in connection with the Merger Agreement or the transactions contemplated thereby, and upon payment of such amounts, no such related party will have any further liability or obligation relating to or arising out of the Merger Agreement or the transactions contemplated thereby.

Prior to valid termination of the Merger Agreement, the parties to the Merger Agreement are entitled to an injunction or injunctions, specific performance, or other equitable relief, to prevent breaches of the Merger Agreement and to enforce specifically the terms and provisions thereof, this being in addition to any other remedy to which they are entitled under the Merger Agreement. However, the right of the Company to seek an injunction, specific performance or other equitable remedies in connection with enforcing the Parent Entities’ obligation to:

 

    cause the equity financing to be funded to fund the Merger (but not the right of the Company to such injunctions, specific performance, or other equitable remedies for obligations other than with respect to funding the Merger) will be subject to the requirements that (i) all conditions to the obligations of the Parent Entities to effect the Merger were satisfied (other than those conditions that by their terms are to be satisfied by actions taken at the closing of the Merger) at the time when the closing would have been required to occur but for the failure of the equity financing to be funded, (ii) the debt financing (including any alternative financing that has been obtained in accordance with the Merger Agreement) has been funded in accordance with the terms thereof or will be funded in accordance with the terms thereof at the closing of the Merger if the equity financing is funded at the closing of the Merger and (iii) the Company has irrevocably confirmed that if specific performance is granted and the equity financing and debt financing are funded, then it would take such actions required of it by the Merger Agreement to cause the closing of the Merger to occur; and

 

   

cause the debt financing to be funded (but not the right of the Company to injunctions, specific performance, or other equitable remedies for obligations other than with respect to the actual funding of the debt financing) will be subject to the requirements that (i) the Marketing Period (as defined in “The Merger Agreement—Parent’s Financing Covenant; Company’s Financial Cooperation Covenant—Marketing Period” beginning on page 131) has ended and all conditions to the obligations of the Parent Entities to effect the Merger were satisfied (other than those conditions that by their terms

 

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are to be satisfied by actions taken at the closing of the Merger) at the time when the closing would have been required to occur but for the failure of the debt financing to be funded and (ii) all of the conditions to the closing of the debt financing provided for in the debt commitment letters have been satisfied or waived (other than those conditions that by their terms are to be satisfied by actions taken at the closing of the Merger or at the time of funding).

While the Company and any of the Parent Entities may pursue both a grant of specific performance and the payment of a termination fee, under no circumstance will either be permitted or entitled to receive both a grant of specific performance that results in a closing of the Merger and a termination fee.

Appraisal Rights

If the Merger is consummated, persons who are stockholders of the Company may have certain rights under Delaware law to dissent and demand appraisal of, and payment in cash of the fair value of, their shares of Company common stock. Any shares of Company common stock held by a person who does not vote in favor of approval and adoption of the Merger Agreement, who properly demands appraisal of such shares of Company common stock and who complies precisely with the applicable provisions of the DGCL, will not be converted into the right to receive the Per Share Merger Consideration. Such appraisal rights, if the stockholder complies with the procedures set forth in Section 262 of the DGCL for exercising and perfecting appraisal rights, will lead to a judicial determination of the fair value (excluding any element of value arising from the accomplishment or expectation of the Merger) required to be paid in cash to such dissenting stockholders for their shares of Company common stock. The value so determined could be more or less than, or the same as, the Per Share Merger Consideration.

You should read “Proposal 1—The Merger—Appraisal Rights” beginning on page 101 for a more complete discussion of the appraisal rights in relation to the Merger as well as Annex D to this Proxy Statement, which contains a full text of Section 262 of the DGCL.

Market Price and Dividend Information

Shares of Company common stock are listed on the NYSE. Since the date of the execution of the Merger Agreement, the Company has paid a quarterly dividend of $0.20 per share of Company common stock and the Board has declared a second quarterly dividend of $0.23 per share of Company common stock payable to holders of record on June 19, 2014 to be paid on July 10, 2014. For a description of the market price of Company common stock and additional dividend information, see “Market Price and Dividend Information” beginning on page 39.

Litigation Relating to the Merger

Since the announcement of the Merger, 14 purported class action complaints were filed by alleged stockholders of the Company against the Company, the individual directors of the Company, and against Cerberus, Ultimate Parent, Parent, Albertson’s LLC and/or Merger Sub. Seven lawsuits were filed in the Delaware Court of Chancery, captioned Barnhard v. Safeway Inc., et al., C.A. No. 9445-VCL (March 13, 2014); Morales v. Safeway Inc., et al., C.A. No. 9455-VCL (March 18, 2014); Ogurkiewicz v. Safeway Inc., et al., C.A. No. 9454- VCL (March 18, 2014); Pipefitters Local 636 Defined Benefit Fund and Oklahoma Firefighters Pension and Retirement System v. Safeway Inc., et al., C.A. No. 9461-VCL (March 20, 2014); Cleveland Bakers and Teamsters Pension and Health & Welfare Funds v. Safeway Inc., et al., C.A. No. 9466-VCL (March 24, 2014); KBC Asset Management NV, Erste-Sparinvest Kapitalanlagegesellschaft m.b.H., Louisiana Municipal Police Employees’ Retirement System, and Bristol County Retirement System v. Safeway Inc., et al., C.A. No. 9492-VCL (March 31, 2014); and The City of Atlanta Firefighters’ Pension Fund v. Safeway Inc., et al., C.A. No. 9495-VCL (April 1, 2014), which have been consolidated by order of the Court as In Re Safeway Inc. Stockholders Litigation, Consol. C.A. 9445-VCL (the “Delaware Action”).

 

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Four other lawsuits were filed in the Superior Court of the State of California, County of Alameda, captioned Lopez v. Safeway Inc., et al., Case No. HG14716651 (March 7, 2014); Groen v. Safeway Inc., et al., Case No. RG14716641 (March 7, 2014); Ettinger v. Safeway Inc., et al., Case No. RG14716842 (March 11, 2014); and Brockton Ret. Board v. Edwards, et al., Case No. RG 14720450 (April 7, 2014), which were consolidated by order of the court (collectively, the “Consolidated California State Actions”). On May 7, 2014, an amended complaint was filed in the Consolidated California State Actions. On May 14, 2014, the court in the above-referenced actions entered an order dismissing the Consolidated California State Actions, finding that the plaintiffs were contractually obligated to bring their claims against defendants in the Delaware Court of Chancery in light of the forum selection clause in the Company’s By-Laws.

Three other lawsuits were filed in the United States District Court for the Northern District of California, and are captioned Steamfitters Local 449 Pensions Fund v. Safeway Inc., et al., Case No. 4:14-cv-01670 (April 10, 2014) (the “Steamfitters action”); Romaneck v. Safeway Inc., et al., Case No. 4:14-cv-02015 (May 1, 2014) (the “Romaneck action”); and Templeton v. Safeway Inc., et al., Case No. 3:14-cv-02412 (May 23, 20214) (collectively, the “Federal Court Actions”). An amended complaint was filed in the Steamfitters action on May 15, 2014.

Each of the cases is purportedly brought on behalf of the Company stockholder class. Collectively, the actions generally allege that the members of the Board breached their fiduciary duties in connection with the Merger because, among other things, the Merger involves an unfair price, a flawed sales process and preclusive deal protection devices. The actions allege that the Company and various combinations of the Parent Entities aided and abetted those alleged breaches of fiduciary duty. The amended complaint in the dismissed Consolidated California State Actions further alleged that the Proxy Statement fails to disclose material information relating to, among other things, the fairness opinions of Goldman Sachs and Greenhill, the Company’s financial projections, analyses concerning the intrinsic value of Blackhawk, and the background of the proposed transaction. The Federal Court Actions also allege that the defendants violated Sections 14 and 20(a) of the Exchange Act because the Proxy Statement fails to disclose material information relating to, among other things, the background of the proposed transaction, the fairness opinions of Goldman Sachs and Greenhill and the Company’s financial projections. Among other remedies, the lawsuits seek to enjoin the Merger, or in the event that an injunction is not entered and the Merger closes, rescission of the Merger or unspecified money damages, costs and attorneys’ and experts’ fees.

On June 13, 2014, the defendants reached an agreement-in-principle providing for a settlement of all of the claims in the Delaware Action on the terms and conditions set forth in a memorandum of understanding (the “Memorandum of Understanding”). Pursuant to the Memorandum of Understanding:

 

    the Board amended the Merger Agreement (which such amendments are incorporated into Amendment No. 2) to (i) change the terms of the PDC CVR Agreement so that, among other things, the PDC Holders would, instead of not receiving any value for any PDC assets that remain unsold at the end of the PDC Sale Deadline, be entitled to the fair market value of the unsold PDC assets, after the payment of certain fees, expenses and debt repayments, and net of certain assumed taxes (based on a 39.25% rate) and (ii) change the terms of the Casa Ley CVR Agreement to, among other things, (A) reduce the Casa Ley Sale Deadline from four years to three years and (B) provide that in the event that any equity interests of Casa Ley owned by the Company remain unsold as of the Casa Ley Sale Deadline, the fair market value determination to be made either mutually by the Company and the Shareholder Representative or by an independent investment banking firm shall exclude any minority, liquidity or similar discount regarding such equity interests relative to the value of Casa Ley in its entirety;

 

    the Board adopted the Company Rights Agreement Amendment to accelerate the expiration date of the Company Rights Agreement; and

 

    the Company made certain changes to this Proxy Statement.

 

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The settlement will be subject to the approval of the Delaware Chancery Court. The Company and the Board believe these claims are entirely without merit and, in the event the settlement does not resolve them, the Company and the Board intend to vigorously defend these actions.

Material United States Federal Income Tax Consequences

The receipt of the Per Share Merger Consideration by a holder in exchange for Company common stock will be a taxable transaction for U.S. federal income tax purposes. The amount of gain or loss a holder recognizes, and the timing and potentially the character of a portion of such gain or loss, depends in part on the U.S. federal income tax treatment of the CVRs, with respect to which there is substantial uncertainty. For a more complete description of the tax consequences of the Merger, see the section entitled “Proposal 1—The Merger—Material United States Federal Income Tax Consequences” beginning on page 114 of this Proxy Statement.

Tax matters are very complicated, and the tax consequences of the Merger to a particular stockholder will depend in part on such stockholder’s circumstances. Accordingly, you are urged to consult your own tax advisor for a full understanding of the tax consequences of the Merger to you, including the applicability and effect of federal, state, local and foreign income and other tax laws.

Additional Information

You can find more information about the Company in the periodic reports and other information we file with the U.S. Securities and Exchange Commission (the “SEC”). The information is available at the SEC’s public reference facilities and at the website maintained by the SEC at www.sec.gov. For a more detailed description of the additional information available, see “Where You Can Find More Information” beginning on page 252.

Anticipated Closing of the Merger

The parties to the Merger Agreement are working to complete the Merger as quickly as possible. In order to complete the Merger, the Company must obtain the stockholder approval described in this Proxy Statement, and the other closing conditions under the Merger Agreement must be satisfied or waived. See “The Merger Agreement—Conditions to the Merger” beginning on page 142. The parties to the Merger Agreement currently expect to complete the Merger in the fourth quarter of 2014, although the Company cannot assure completion by any particular date, if at all. Because the Merger is subject to a number of conditions, the exact timing of the Merger cannot be determined at this time.

 

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QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND THE MERGER

Q: Why am I receiving this Proxy Statement?

A: As a stockholder of record at the close of business on June 2, 2014, the record date for the Annual Meeting, you are entitled to receive notice of and to attend and vote at the Annual Meeting. This year’s annual meeting will be particularly significant and your vote is extremely important because, on March 6, 2014, we entered into the Merger Agreement with the Parent Entities providing for the Merger of Merger Sub with and into the Company, with the Company surviving the Merger as a wholly-owned subsidiary of Parent. You are receiving this Proxy Statement in connection with, among other items, the solicitation of proxies by the Board in favor of the approval and adoption of the Merger Agreement. This Proxy Statement contains important information about the Merger, the Merger Agreement and the Annual Meeting.

Q: Why is the Company holding the Annual Meeting?

A: Under the DGCL, and in accordance with our By-Laws, we are required to hold a meeting of the stockholders annually. At the Annual Meeting, you will be asked to, among other things, approve and adopt the Merger Agreement.

Q: What matters will be voted on at the Annual Meeting?

A: You will be asked to consider and vote on the following proposals:

 

    approval and adoption of the Merger Agreement;

 

    a non-binding, advisory proposal to approve certain compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”);

 

    a proposal to adjourn the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

    a proposal to elect as directors the nine nominees named in this Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

    a non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”);

 

    a proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

    a stockholder proposal regarding labeling products that contain genetically engineered ingredients, if properly presented at the Annual Meeting;

 

    a stockholder proposal regarding extended producer responsibility, if properly presented at the Annual Meeting; and

 

    such other business as may properly come before the Annual Meeting and any adjournments or postponements.

Q: What will happen in the Merger?

A: In the Merger, Merger Sub will be merged with and into the Company and the Company will continue as the surviving corporation and will become a wholly-owned subsidiary of Parent. As a result of the Merger, the

 

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Company common stock will no longer be publicly traded. In addition, the Company common stock will be delisted from NYSE and deregistered under the Exchange Act.

Q: As a stockholder, what will I receive in the Merger?

A: As more fully described in the Merger Agreement, if the Merger is completed, you will be entitled to receive for each share of Company common stock that you own immediately prior to the effective time of the Merger the Per Share Merger Consideration consisting of (i) $32.50 in cash (the “Initial Cash Merger Consideration”), (ii) a pro-rata portion of any net proceeds with respect to certain sales of (x) Safeway’s 49% interest (the “Casa Ley Interest”) in Casa Ley, S.A. de C.V., a Mexico-based food and general merchandise retailer (“Casa Ley”) and (y) Safeway’s real-estate development subsidiaries Property Development Centers, LLC and PDC I, Inc., which will own certain shopping centers and related Safeway stores (“PDC”), (iii) a pro-rata portion of certain after-tax amounts received by the Company as dividends or distributions in respect of the Casa Ley Interest or that are paid from the operating earnings of PDC, (iv) if the closing of the Merger occurs after March 5, 2015, $0.005342 per day for each day from (and including) March 5, 2015 through (and including) the closing of the Merger (the “Additional Cash Merger Consideration”), and (v) if the sale of the Casa Ley Interest and/or the PDC assets are not fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, (x) one contingent value right relating to the sale of any remaining Casa Ley Interest and deferred consideration (which we refer to as a “Casa Ley CVR”) and/or (y) one contingent value right relating to the sale of any remaining PDC assets and deferred consideration (a “PDC CVR”). We refer to the amounts and rights in (i), (ii), (iii), (iv) and (v) above as the “Per Share Merger Consideration” and the amounts in (i), (ii), (iii) and (iv) above as the “Per Share Cash Merger Consideration.” Any amounts to be received in connection with the Casa Ley CVR and/or the PDC CVR, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “Casa Ley Contingent Value Rights Agreement—Payment Not Certain” beginning on page 160 and “PDC Contingent Value Rights Agreement—Payment Not Certain” beginning on page 168. You are advised to approve and adopt the Merger Agreement only if you are willing to assume the risk that these contingent events may not occur and that there may be no cash consideration ultimately paid to you in excess of $32.50 per share of Company common stock. The Per Share Merger Consideration you will be entitled to receive will also be net of any required withholding taxes and will not include any interest.

See “The Merger Agreement—Per Share Merger Consideration” beginning on page 120 for a more detailed description of the Per Share Merger Consideration. See “Casa Ley Contingent Value Rights Agreement” beginning on page 154 for a more detailed description of the Casa Ley CVR. See “PDC Contingent Value Rights Agreement” beginning on page 161 for a more detailed description of the PDC CVR.

See “Proposal 1—The Merger—Material United States Federal Income Tax Consequences” beginning on page 114 for a more detailed description of the United States federal tax consequences of the Merger. You should consult your own tax advisor for a full understanding of how the Merger will affect your federal, state, local and/or non-U.S. taxes.

Q: How does the Per Share Merger Consideration compare to the market price of the Company common stock prior to announcement of strategic alternatives?

A: The Per Share Merger Consideration consists of:

 

  i. $32.50 in cash;

 

  ii. a pro-rata portion of any net proceeds with respect to certain sales of the Casa Ley Interest and PDC;

 

  iii. a pro-rata portion of certain after-tax amounts received by the Company as dividends or distributions in respect of the Casa Ley Interest or that are paid from the operating earnings of PDC;

 

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  iv. if the closing of the Merger occurs after March 5, 2015, $0.005342 per day for each day from (and including) March 5, 2015 through (and including) the closing of the Merger; and

 

  v. if the sale of the Casa Ley Interest and/or the PDC assets are not fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, (x) a Casa Ley CVR and/or (y) a PDC CVR.

The Board’s estimate of the Per Share Merger Consideration and the value of the Blackhawk Class B common stock to be distributed to Company stockholders in the Blackhawk Distribution, which the Board estimated in February 2014 to be between $40.58 and $40.90, represents a 43.7%—44.8% premium to the price of $28.24, which was the closing price of shares of Company common stock on September 16, 2013, the last full trading day before JANA Partners filed a Schedule 13D reporting a 6.2% ownership stake in the Company, a 53.4%—54.6% premium to the Company’s 30-day trading average ($26.45) to September 16, 2013, and a 60.1%—61.3% premium to the Company’s 90-day trading average ($25.35) to September 16, 2013. The Board’s estimate of the Per Share Merger Consideration and the value of the Blackhawk Class B common stock to be distributed to Company stockholders in the Blackhawk Distribution also represents a 17.2%—18.2% premium to the price of $34.61, which was the closing price of shares of Company common stock on February 19, 2014, the last full trading day before the public announcement by the Company that the Company was in discussions concerning a possible transaction involving the sale of the Company, a 27.5%—28.5% premium to the Company’s 30-day trading average ($31.82) to February 19, 2014, and a 24.6%—25.6% premium to the Company’s 90-day trading average ($32.56) to February 19, 2014. The Board’s estimate of the Per Share Merger Consideration and the value of the Blackhawk Class B common stock to be distributed to Company stockholders in the Blackhawk Distribution also represents a 69.5%—70.8% premium to the price of $23.94, which was the closing price of shares of Company common stock on March 6, 2013, the date that is one year prior to the signing of the Merger Agreement, an 85.9%—87.3% premium to the Company’s 30-day trading average ($21.83) to March 6, 2013, and a 108.1%—109.7% premium to the Company’s 90-day trading average ($19.50) to March 6, 2013. On June 17, 2014, the most recent practicable date before this Proxy Statement was mailed to our stockholders, the closing price of shares of Company common stock was $33.97 per share. This closing share price was after the completion of the Blackhawk Distribution on April 14, 2014. You are encouraged to obtain current market quotations of Company common stock in connection with voting your shares.

The aggregate Per Share Merger Consideration to be received by our stockholders will vary depending upon the amount of distributions received in relation to sales of the Casa Ley Interest and PDC, which amounts are not yet determined, as well as the timing of the closing of the Merger Agreement.

Any amounts to be received in connection with the Casa Ley CVR and/or the PDC CVR, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “Casa Ley Contingent Value Rights Agreement—Payment Not Certain” beginning on page 160 and “PDC Contingent Value Rights Agreement—Payment Not Certain” beginning on page 168. You are advised to approve and adopt the Merger Agreement only if you are willing to assume the risk that these contingent events may not occur and that there may be no cash consideration ultimately paid to you in excess of $32.50 per share of Company common stock. The Per Share Merger Consideration you will be entitled to receive will also be net of any required withholding taxes and will not include any interest.

Q: What will happen to any Company stock options or other equity awards granted by the Company in the Merger?

A: All Company Options, whether or not vested, will be cancelled immediately prior to the effective time of the Merger in exchange for cash in an amount equal to the excess, if any, of the Per Share Cash Merger Consideration over the Option Price of such Company Option (the “Option Payment”) payable at the effective time of the Merger as well as the right to receive Casa Ley CVRs and/or PDC CVRs (as applicable) in respect of

 

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shares of Company common stock subject to such cancelled Company Options that have an Option Price less than the Per Share Cash Merger Consideration.

All Performance Share Awards will vest at the target levels specified for such awards and will be cancelled in exchange for the right to receive an amount in cash equal to the product of the number of vested shares of Company common subject to such Performance Share Awards and the Per Share Cash Merger Consideration, as well as the right to receive Casa Ley CVRs and/or PDC CVRs (as applicable) in respect of vested shares of Company common stock subject to such cancelled Performance Share Awards.

All Restricted Stock Units will vest and will be cancelled in exchange for the right to receive an amount in cash equal to the product of the number of vested shares of Company common stock subject to such Restricted Stock Units and the Per Share Cash Merger Consideration, as well as the right to receive Casa Ley CVRs and/or PDC CVRs (as applicable) in respect of vested shares of Company common stock subject to such cancelled Restricted Stock Units.

All outstanding shares of restricted Company common stock will become fully vested immediately prior to the effective time and will be cancelled in exchange for the right to receive the Per Share Merger Consideration.

Q: What are the Casa Ley CVRs?

A: The Casa Ley CVRs are non-transferable contingent value rights to be issued as part of the Per Share Merger Consideration if the Casa Ley Interest has not been completely sold prior to the closing of the Merger. Each Casa Ley CVR gives the holder of such Casa Ley CVR (a “Casa Ley Holder”) the right to a pro-rata portion of the net proceeds from the sale of all or any portion of the Casa Ley Interest that remains unsold as of the closing of the Merger and any deferred consideration relating to any sale of any portion of the Casa Ley Interest that has not been paid to the Company prior to the closing of the Merger.

The Casa Ley CVRs are non-marketable, will not be listed on any securities exchange and will not be transferable, subject to limited exceptions. There is no assurance that any payment will be made under the Casa Ley CVRs, or regarding the amount or timing of any such payment. Any amounts to be received in connection with the Casa Ley CVRs, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “Casa Ley Contingent Value Rights Agreement—Payment Not Certain” beginning on page 160. You are advised to approve and adopt the Merger Agreement only if you are willing to assume the risk that these contingent events may not occur and that there may be no cash consideration ultimately paid to you in excess of $32.50 per share of Company common stock.

The Casa Ley CVRs generally provide for a payment to Casa Ley Holders following the sale of the Casa Ley Interest, if any, for amounts that generate proceeds in excess of certain costs, fees, expenses, indebtedness and other amounts. There are numerous risks and uncertainties associated with receiving payment under the Casa Ley CVRs, including the restrictions on transfer with respect to the Casa Ley Interest and that the Casa Ley Interest may not be sold for a value sufficient to generate a payment to the Casa Ley Holders, or may not be sold at all. If the entire Casa Ley Interest is not sold by the Casa Ley Sale Deadline, the Casa Ley CVR provides for a payment equal to the excess, if any, of (x) the fair market value (excluding any minority, liquidity or similar discount to the valuation of Casa Ley in its entirety), as determined either mutually by the Company and the Shareholder Representative or by an independent investment banking firm, of any portion of the Casa Ley Interest that remains unsold as of the Casa Ley Sale Deadline (as well as any unpaid proceeds arising from partial sales consummated prior to the Casa Ley Sale Deadline and certain dividends or distributions received by the Company from Casa Ley, to the extent not previously paid to the Casa Ley Holders) over (y) certain related fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the Casa Ley Interest. There is no guarantee of any such value and there can be no assurance that any such valuation will ultimately generate any cash proceeds to the Casa Ley Holders or when any such cash proceeds would be payable to the Casa Ley Holders. Additionally, the Casa Ley CVRs will not have any voting or dividend rights. The Casa Ley CVRs will not represent any equity or ownership interest in any Parent Entity,

 

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the Company, the Shareholder Representative or any of their respective affiliates or in any constituent company to the Merger. In addition, there is substantial uncertainty regarding the tax treatment of the Casa Ley CVRs. See “Proposal 1—The Merger—Material United States Federal Income Tax Consequences” beginning on page 114 for a more complete description of the tax consequences of receiving Casa Ley CVRs.

When entered into, the Casa Ley CVR Agreement will control the terms pursuant to which payments will be made to Casa Ley Holders. For a more detailed summary of the Casa Ley CVRs, see “Casa Ley Contingent Value Rights Agreement” on page 154.

Q: What are the PDC CVRs?

A: The PDC CVRs are non-transferable contingent value rights to be issued as part of the Per Share Merger Consideration if the PDC assets have not been completely sold prior to the closing of the Merger. Each PDC CVR gives the holder of such PDC CVR (a “PDC Holder”) the right to a pro-rata share of the net proceeds from the sale of all or any portion of PDC that remains unsold as of the closing of the Merger and any deferred consideration relating to any sale of any portion of PDC that has not been paid to the Company prior to the closing of the Merger.

The PDC CVRs are non-marketable, will not be listed on any securities exchange and will not be transferable, subject to limited exceptions. There is no assurance that any payment will be made under the PDC CVRs, or regarding the amount or timing of any such payment. Any amounts to be received in connection with the PDC CVRs, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “PDC Contingent Value Rights Agreement—Payment Not Certain” beginning on page 168. You are advised to approve and adopt the Merger Agreement only if you are willing to assume the risk that these contingent events may not occur and that there may be no cash consideration ultimately paid to you in excess of $32.50 per share of Company common stock.

The PDC CVRs generally provide for a payment to the PDC Holders following the sale of the PDC assets, if any, for amounts that generate proceeds in excess of certain costs, fees, expenses, indebtedness and other amounts. There are numerous risks and uncertainties associated with receiving payment under the PDC CVRs, including the possibility that PDC will default under its debt commitments, that PDC may not be sold for a value sufficient to generate a payment to the PDC Holders, or may not be sold at all, and that the Company will not receive any dividends or distributions from the operating profits of PDC. If all of the remaining PDC assets have not sold by the PDC Sale Deadline, the PDC CVR provides for a payment equal to the excess, if any, of (x) the fair market value of the PDC assets that remain unsold as of the PDC Sale Deadline, as determined either mutually by the Company and the Shareholder Representative or by a qualified real estate appraiser (as well as any unpaid proceeds arising from partial sales consummated prior to the PDC Sale Deadline and certain dividends or distributions received by the Company from the operating earnings of PDC, to the extent not previously paid to the PDC Holders) over (y) certain related fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the PDC assets. There is no guarantee of any such value and there can be no assurance that any such valuation will ultimately generate any cash proceeds to the PDC Holders or when any such cash proceeds would be payable to the PDC Holders. Additionally, the PDC CVRs will not have any voting or dividend rights. The PDC CVRs will not represent any equity or ownership interest in any Parent Entity, the Company, the Shareholder Representative or any of their respective affiliates or in any constituent company to the Merger. In addition, there is substantial uncertainty regarding the tax treatment of the PDC CVRs. See “Proposal 1—The Merger—Material United States Federal Income Tax Consequences” beginning on page 114 for a more complete description of the tax consequences of receiving PDC CVRs.

When entered into, the PDC CVR Agreement will control the terms pursuant to which payments will be made to PDC Holders. For a more detailed summary of the PDC CVRs, see “PDC Contingent Value Rights Agreement” on page 161.

 

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Q: As a stockholder of the Company, will I be able to trade any CVRs that I receive in connection with the Merger?

A: The CVRs issued to the Company stockholders in connection with the Merger will not be marketable or listed on any securities exchange and will not be transferable, subject to limited exceptions.

Q: What is the time limit for sale of the interest underlying the Casa Ley CVRs?

A: The Casa Ley CVR Agreement requires the Casa Ley Interest to have been sold by the Casa Ley Sale Deadline, which is the later of (i) the three year anniversary of the closing of the Merger and (ii) if one or more Casa Ley sales agreements are executed prior to the three year anniversary of the closing of the Merger but the sale of the applicable Casa Ley Interest has not closed, 60 days after the date all such Casa Ley sales agreements have either been terminated or all closings under such sales agreements have occurred. In the event that a sale of the entire Casa Ley Interest has not been consummated as of the Casa Ley Sale Deadline, each Casa Ley Holder shall be entitled to the pro-rata portion of the Casa Ley Sale Deadline Net Proceeds, which includes the excess, if any, of (x) the fair market value (excluding any minority, liquidity or similar discount to the valuation of Casa Ley in its entirety), as determined either mutually by the Company and the Shareholder Representative or by an independent investment banking firm, of any portion of the Casa Ley Interest that remains unsold as of the Casa Ley Sale Deadline (as well as any unpaid proceeds arising from partial sales consummated prior to the Casa Ley Sale Deadline and certain dividends or distributions received by the Company from Casa Ley, to the extent not previously paid to the Casa Ley Holders) over (y) certain related fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the Casa Ley Interest, as detailed in “Casa Ley Contingent Value Rights Agreement” beginning on page 154.

Q: What is the time limit for sale of the assets underlying the PDC CVRs?

A: The PDC CVR Agreement requires PDC to have been sold by the PDC Sale Deadline, which is the later of (i) the two year anniversary of the closing of the Merger and (ii) if one or more PDC sales agreements are executed prior to the two year anniversary of the closing of the Merger but the applicable sale of PDC has not closed, 60 days after the date all such PDC sales agreements have either been terminated or all closings under such sales agreements have occurred. In the event that a sale of all of the PDC assets has not been consummated as of the PDC Sale Deadline, each PDC Holder shall be entitled to the pro-rata portion of the PDC Sale Deadline Net Proceeds, which includes the excess, if any, of (x) the fair market value of the PDC assets that remain unsold as of the PDC Sale Deadline, as determined either mutually by the Company and the Shareholder Representative or by a qualified real estate appraiser (as well as any unpaid proceeds arising from partial sales consummated prior to the PDC Sale Deadline and certain dividends or distributions received by the Company from the operating earnings of PDC, to the extent not previously paid to the PDC Holders ) over (y) certain related fees, expenses and assumed taxes (based on a 39.25% rate) that would have been deducted in calculating net proceeds from a sale of the PDC assets, as detailed in “PDC Contingent Value Rights Agreement” beginning on page 161.

Q: Who is the Shareholder Representative and what is its role?

A: The Shareholder Representative will consist of a committee, or an entity controlled by a committee, comprised of three individuals who were members of the Board immediately prior to the closing of the Merger and which the Company will determine prior to the closing of the Merger. The Shareholder Representative will be a party to each of the Casa Ley CVR Agreement and the PDC CVR Agreement and will be responsible for conducting the sale process of both the Casa Ley Interest and PDC. The Shareholder Representative will act by a majority vote of the members of the committee on behalf of the Casa Ley Holders or PDC Holders, as applicable. The Shareholder Representative will have exclusive authority to make all decisions and to act on behalf of, and as agent for, the Casa Ley Holders or PDC Holders, as well as sole and exclusive authority to enforce the rights of such holders.

The Casa Ley Holders or PDC Holders, as applicable, will have limited recourse against the Shareholder Representative and will not have direct recourse against the Company or Ultimate Parent. None of the

 

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Shareholder Representative or any individual member of the committee comprising or controlling the Shareholder Representative will have any liability for (i) the performance or lack thereof, of its duties under the Casa Ley CVR Agreement or PDC CVR Agreement, (ii) acts or omissions of other parties to such agreements or (iii) damages, losses or expenses arising out of such agreements, other than due to gross negligence, bad faith or wilful or intentional misconduct. Additionally, such persons do not owe any duties or obligations to the Casa Ley Holders or PDC Holders, fiduciary or otherwise, other than those expressly set forth in either the Casa Ley CVR Agreement or PDC CVR Agreement and the duty to act in good faith.

Any individual member of the committee that comprises or controls the Shareholder Representative may resign at any time by giving thirty (30) days’ written notice of such resignation. If any such individual member resigns, is removed or becomes incapable of acting, the remaining members of the committee that comprises or controls the Shareholder Representative shall promptly appoint a qualified successor to the committee. Any such successor member may not be a director, officer or employee of the Company or its affiliates after the closing of the Merger.

See “Casa Ley Contingent Value Rights Agreement” beginning on page 154, and “PDC Contingent Value Rights Agreement” beginning on page 161 for additional information regarding the Shareholder Representative.

Q: What are the tax consequences of the Merger?

A: The receipt of the Per Share Merger Consideration by a holder in exchange for Company common stock will be a taxable transaction for U.S. federal income tax purposes. The amount of gain or loss a holder recognizes, and the timing and potentially the character of a portion of such gain or loss, depends in part on the U.S. federal income tax treatment of the CVRs, with respect to which there is substantial uncertainty. For a more complete description of the tax consequences of the Merger, see the section entitled “Proposal 1—The Merger—Material United States Federal Income Tax Consequences” beginning on page 114 of this Proxy Statement. Tax matters are very complicated, and the tax consequences of the Merger to a particular stockholder will depend in part on such stockholder’s circumstances. Accordingly, you are urged to consult your own tax advisor for a full understanding of the tax consequences of the Merger to you, including the applicability and effect of federal, state, local and foreign income and other tax laws.

Q: When and where is the Annual Meeting?

A: The Annual Meeting will be held at our corporate headquarters, 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229 on July 25, 2014 at 1:30 p.m., Pacific time.

Q: What constitutes a quorum for the Annual Meeting?

A: The presence, in person or by proxy, of stockholders representing a majority of the shares of the Company common stock outstanding and entitled to vote at the Annual Meeting will constitute a quorum for the Annual Meeting. If you are a stockholder of record and you submit a properly executed proxy card by mail, submit your proxy by telephone or via the Internet or vote in person at the Annual Meeting, then your shares of Company common stock will be counted as part of the quorum. If you are a “street name” holder of shares of Company common stock and you provide your brokerage firm, bank, trust or other nominee with instructions as to how to vote your shares or obtain a legal proxy from such broker or nominee to vote your shares in person at the Annual Meeting, then your shares will be counted as part of the quorum. All shares of Company common stock held by stockholders that are present in person or represented by proxy and entitled to vote at the Annual Meeting, regardless of how such shares are voted or whether such stockholders abstain from voting, will be counted in determining the presence of a quorum.

Q: What vote of our stockholders is required to approve and adopt the Merger Agreement?

A: To approve and adopt the Merger Agreement, the holders as of the record date of at least a majority of the outstanding shares of Company common stock must vote such shares “FOR” the proposal to approve and adopt the Merger Agreement.

 

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At the close of business on June 2, 2014, the record date for the Annual Meeting, 230,399,204 shares of Company common stock were outstanding and entitled to vote at the Annual Meeting.

Q: What vote is required to approve the proposals to be presented at the Annual Meeting other than the proposal to approve and adopt the Merger Agreement?

A: The approval of the proposals other than the proposal to approve and adopt the Merger Agreement each require the affirmative vote of “a majority of votes cast” by the holders as of the record date of the outstanding shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A “majority of the votes cast” means that the number of votes cast “FOR” a director candidate or proposal must exceed the number of votes cast “AGAINST” that candidate or proposal. In accordance with our By-Laws, for purposes of determining the outcome of the election of directors or any proposal, shares represented by proxies reflecting abstentions or broker non-votes will be treated as not present and not entitled to vote with respect to such election or proposal. In light of the foregoing considerations, any abstentions or broker non-votes will not affect the election of any candidate or the approval or rejection of any proposal other than the proposal to approve and adopt the Merger Agreement.

Q: Why am I being asked to cast a non-binding, advisory vote to approve the “Merger-related compensation proposal” that may be paid or become payable to the Company’s named executive officers in connection with the Merger?

A: In accordance with the rules promulgated under Section 14A of the Exchange Act, the Company is providing its stockholders with the opportunity to cast a non-binding, advisory vote on the compensation that may be paid or become payable to the Company’s named executive officers in connection with the Merger. This proposal is referred to as the “Merger-related compensation proposal.”

Q: What is the “Merger-related compensation”?

A: The “Merger-related compensation” is certain compensation that is tied to or based on the closing of the Merger and payable to the Company’s named executive officers under existing agreements with the Company. See “Proposal 2—Merger-Related Compensation” beginning on page 172.

Q: What will happen if stockholders do not approve the “Merger-related compensation proposal” at the Annual Meeting?

A: The non-binding, advisory vote on the “Merger-related compensation proposal” is a vote separate and apart from the vote to approve and adopt the Merger Agreement. Approval of the “Merger-related compensation proposal” is not a condition to the closing of the Merger. The vote with respect to the “Merger-related compensation proposal” will not be binding on the Company or the Parent Entities. Further, the underlying plans and arrangements are contractual in nature and not, by their terms, subject to stockholder approval. Accordingly, regardless of the outcome of the non-binding advisory proposal, if the Merger Agreement is approved and adopted by the stockholders and the Merger is completed, our named executive officers will or may become entitled to receive the “Merger-related compensation” upon the closing of the Merger.

Q: Why am I being asked to cast a non-binding, advisory vote to approve the compensation of the Company’s named executive officers (“say on pay proposal” vote)?

A: In accordance with the rules promulgated under Section 14A of the Exchange Act, the Company is providing its stockholders with the opportunity to cast a non-binding, advisory vote on the compensation of the Company’s named executive officers.

Q: How many votes do I have?

A: You are entitled to one vote for each share of Company common stock that you hold as of the record date.

 

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Q: Who can attend and vote at the Annual Meeting?

A: All stockholders of record as of the close of business on June 2, 2014, the record date for the Annual Meeting, are entitled to receive notice of and to attend and vote at the Annual Meeting, or any postponement or adjournment thereof. If you wish to attend the Annual Meeting and your shares of Company common stock are held in an account at a broker, dealer, commercial bank, trust company or other nominee (i.e. in “street name”), you may vote those shares in person at the meeting only if you obtain and bring with you a signed proxy from the necessary nominee giving you the right to vote the shares. To obtain a signed proxy prior to the Annual Meeting, you should contact your nominee. Admission to the Annual Meeting will be on a first-come, first-served basis.

Q: How does the Board recommend that I vote?

A: The Board, after careful consideration, unanimously recommends that our stockholders vote:

 

    FOR” the proposal to approve and adopt the Merger Agreement;

 

    FOR” the non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”);

 

    FOR” the proposal to approve the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

    FOR” the proposal to elect as directors the nine nominees named in this Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

    FOR” the non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”);

 

    FOR” the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

    AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding labeling products that contain genetically engineered ingredients; and

 

    AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding extended producer responsibility.

You should read “Proposal 1—The Merger—Recommendation of the Board; Reasons for Recommending the Approval and Adoption of the Merger Agreement” beginning on page 71 for a discussion of the factors that the Board considered in deciding to recommend the approval and adoption of the Merger Agreement.

Q: What will happen to the Company’s directors if the Merger is completed?

A: If the Merger is completed, the Board following the completion of the Merger will be composed of the directors of Merger Sub at the closing of the Merger, and all directors of the Company immediately prior to the closing of the Merger will cease to be directors of the Company as of the closing of the Merger.

Q: Do any of the Company’s directors or officers have interests in the Merger that may differ from or be in addition to my interests as a stockholder?

A: In considering the recommendation of the Board with respect to the Merger Agreement, you should be aware that some of the Company’s directors and executive officers may have interests that are different from, or in addition to, the interests of our stockholders generally. See “Proposal 1—The Merger—Interests of the Company’s Directors and Executive Officers in the Merger,” beginning on page 110 for additional information.

 

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Q: How will our directors and executive officers vote on the proposal to approve and adopt the Merger Agreement?

A: Our directors and current executive officers have informed us that, as of the date of this Proxy Statement, they intend to vote all of their shares of Company common stock in favor of the approval and adoption of the Merger Agreement. As of June 2, 2014, the record date for the Annual Meeting, our directors and current executive officers beneficially owned, in the aggregate, 4,560,263 shares of Company common stock, or collectively approximately 2.0% of the outstanding shares of Company common stock.

Q: Will I be entitled to receive any dividends prior to the closing of the Merger?

A: Under the terms of the Merger Agreement, the Company is prohibited from authorizing, declaring, setting aside or paying any dividend or other distribution, other than quarterly dividends per share of $0.20, $0.23, $0.23, $0.23 and $0.23, respectively, or of certain net proceeds from sales of the Casa Ley Interest and/or PDC, subject to certain exceptions. Although the Company expects to continue to pay quarterly dividends on the Company common stock, the payment of future dividends is at the discretion of the Board and will depend upon the Company’s earnings, capital requirements, financial condition and other factors. Since the date of the execution of the Merger Agreement, the Company has paid a quarterly dividend of $0.20 per share of Company common stock and the Board has declared a second quarterly dividend of $0.23 per share of Company common stock payable to holders of record on June 19, 2014 to be paid on July 10, 2014. See “Market Price and Dividend Information” beginning on page 39.

Q: What happens if I sell my shares of Company common stock before the Annual Meeting?

A: The record date for stockholders entitled to vote at the Annual Meeting is earlier than the date of the Annual Meeting and the expected closing date of the Merger. If you transfer your shares of Company common stock after the record date but before the Annual Meeting, you will, unless special arrangements are made, retain your right to vote at the Annual Meeting but will transfer the right to receive the Per Share Merger Consideration to the person to whom you transfer your shares. In addition, if you sell your shares of Company common stock prior to the Annual Meeting or prior to the completion of the Merger, you will not be eligible to exercise your appraisal rights in respect of such shares. For a more detailed discussion of your appraisal rights and the requirements for perfecting your appraisal rights, see “Proposal 1—The Merger—Appraisal Rights” beginning on page 101. For the full text of Section 262 of the DGCL, please see Annex D to this Proxy Statement.

Q: Am I entitled to exercise appraisal rights instead of receiving the Per Share Merger Consideration for my shares of Company common stock?

A: Holders of shares of Company common stock who do not vote in favor of approval and adoption of the Merger Agreement will have the right to seek appraisal and receive the fair value of their shares of Company common stock in lieu of receiving the Per Share Merger Consideration in cash if the Merger closes, but only if they perfect their appraisal rights by precisely complying with the required procedures under the DGCL. Because of the complexity of the DGCL relating to appraisal rights, if you are considering exercising your appraisal rights we encourage you to seek the advice of your own legal counsel. See “Proposal 1—The Merger—Appraisal Rights” beginning on page 101. For the full text of Section 262 of the DGCL, please see Annex D to this Proxy Statement.

Q: How do I cast my vote if I am a holder of record?

A: If you were a holder of record on June 2, 2014, you may vote in person at the Annual Meeting or by submitting a proxy for the Annual Meeting. You can submit your proxy by completing, signing, dating and returning the enclosed proxy card in the accompanying pre-addressed, postage paid envelope. Holders of record may also vote by telephone or the Internet by following the instructions on the proxy card.

If you properly transmit your proxy, but do not indicate how you want to vote, your proxy will be voted:

 

    FOR” the approval and adoption of the Merger Agreement;

 

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    FOR” the non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”);

 

    FOR” the proposal to approve the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

    FOR” the proposal to elect as directors the nine nominees named in this Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

    FOR” the non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”);

 

    FOR” the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

    AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding labeling products that contain genetically engineered ingredients; and

 

    AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding extended producer responsibility.

Q: How do I cast my vote if my shares of Company common stock are held in “street name” by my broker, dealer, commercial bank, trust company or other nominee?

A: If you hold shares in “street name” through a broker, dealer, commercial bank, trust company or other nominee, then you received this Proxy Statement from the nominee, along with the nominee’s voting instructions. You should instruct your broker, bank or other nominee on how to vote your shares of Company common stock using the voting instructions. Please refer to the voting instruction card used by your broker, dealer, commercial bank, trust company or other nominee to see if you may submit voting instructions using the Internet or telephone.

Q: What will happen if I abstain from voting or fail to vote on the proposals presented at the Annual Meeting?

A: If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote, it will have the same effect as a vote “AGAINST” the proposal to approve and adopt the Merger Agreement and have no effect on the non-binding “Merger-related compensation proposal,” the adjournment proposal, the election of directors proposal, the non-binding “say on pay proposal,” the appointment of an independent registered public accounting firm proposal and the two stockholder proposals. If you fail to submit a proxy and do not attend the Annual Meeting, your shares of Company common stock will not be voted, and will have the same effect as voting “AGAINST” the proposal to approve and adopt the Merger Agreement, and will have no effect in determining whether the non-binding “Merger-related compensation proposal,” the adjournment proposal, the election of directors proposal, the non-binding “say on pay proposal,” the appointment of an independent registered public accounting firm proposal and the two stockholder proposals have received the affirmative vote of a majority of votes cast by the holders as of the record date of the shares of the Company common stock present in person or by proxy and entitled to vote at the Annual Meeting. If you fail to give voting instructions to your broker, dealer, commercial bank, trust company or other nominee, your shares of Company common stock will not be voted, and will have the same effect as voting “AGAINST” the proposal to approve and adopt the Merger Agreement, and will have no effect in determining whether the non-binding “Merger-related compensation proposal,” the adjournment proposal, the election of directors proposal, the non-binding “say on pay proposal” and the two stockholder proposals has each received the affirmative vote of a majority of votes cast by the holders as of the record date of the shares of the Company common stock present in person or by proxy and entitled to vote at the Annual Meeting. Under the NYSE rules, brokers, banks and other nominees will have discretionary authority to vote on the appointment of an independent registered public accounting firm proposal.

 

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Q: Can I change my vote after I have delivered my proxy?

A: Yes. If you are a record holder, you can change your vote at any time before your proxy is voted at the Annual Meeting by properly delivering a later-dated proxy either by mail, the Internet or telephone or attending the Annual Meeting in person and voting. You also may revoke your proxy by delivering a notice of revocation to the Company’s corporate secretary prior to the vote at the Annual Meeting. If your shares of Company common stock are held in street name, you must contact your broker, dealer, commercial bank, trust company or other nominee to revoke your proxy.

Q: What happens if the Annual Meeting is adjourned?

A: Unless a new record date is fixed, your proxy will still be valid and may be voted at the adjourned meeting. You will still be able to change or revoke your proxy at any time until it is voted.

Q: What should I do if I receive more than one set of voting materials?

A: You may receive more than one set of voting materials, including multiple copies of this Proxy Statement or multiple proxies or voting instruction cards. For example, if you hold your shares of Company common stock in more than one brokerage account, you will receive a separate voting instruction card for each brokerage account in which you hold shares of Company common stock. If you are a holder of record and your shares of Company common stock are registered in more than one name, you will receive more than one proxy card. Please submit each proxy and voting instruction card that you receive.

Q: If I am a holder of certificated shares of Company common stock, should I send in my share certificates now?

A: No. Promptly after the Merger is completed, each holder of record of shares of Company common stock as of the time of the Merger will be sent written instructions for exchanging their stock certificates for the Per Share Merger Consideration. These instructions will tell you how and where to send in your stock certificates for your cash consideration. You will receive your cash payment after the Paying Agent receives your share certificates and any other documents requested in the instructions. Please do not send stock certificates with your proxy. Holders of uncertificated shares of Company common stock (i.e. holders whose shares are held in book-entry) will automatically receive their cash consideration as soon as practicable after the effective time of the Merger without any further action required on the part of such holders. See “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares, Performance Share Awards and Restricted Stock Units—Exchange and Payment Procedures” beginning on page 124 for additional information.

Q: What happens if one or more of my share certificates are lost, stolen or destroyed?

A: If your share certificate is lost, stolen or destroyed, you must deliver an affidavit of the loss, theft or destruction, and may be required by the Paying Agent to post a customary bond as indemnity against any claim that may be made with respect to such certificate prior to receiving the Per Share Merger Consideration. See “The Merger Agreement—Treatment of Common Stock, Options, Restricted Shares, Performance Share Awards and Restricted Stock Units—Exchange and Payment Procedures” beginning on page 124 for additional information.

Q: What happens if the Merger is not completed?

A: If the Merger Agreement is not approved and adopted by our stockholders, or if the Merger is not completed for any other reason, our stockholders will not receive any payment for their Company common stock pursuant to the Merger Agreement. Instead, we will remain as a public company and shares of Company common stock will continue to be registered under the Exchange Act and listed and traded on the New York Stock Exchange. Under circumstances specified in the Merger Agreement, we may be required to pay Ultimate Parent a termination fee of up to $250 million or up to $50 million of the documented, reasonable out-of-pocket fees and expenses incurred by the Parent Entities in connection with the transactions contemplated by the Merger Agreement (depending on the

 

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nature of the termination). In addition, under circumstances specified in the Merger Agreement, the Company may be entitled to receive from the Parent Entities a termination fee of $400 million (depending on the nature of the termination). See “The Merger Agreement—Effect of Termination,” beginning on page 145.

Q: When is the Merger expected to be completed?

A: The parties to the Merger Agreement are working to complete the Merger as quickly as possible. In order to complete the Merger, the Company must obtain the stockholder approval described in this Proxy Statement, and the other closing conditions under the Merger Agreement must be satisfied or waived. The parties to the Merger Agreement currently expect to complete the Merger in the fourth quarter of 2014, although the Company cannot assure completion by any particular date, if at all. Because the Merger is subject to a number of conditions, the exact timing of the Merger cannot be determined at this time.

Q: How will I know the Merger has occurred?

A: If the Merger occurs, the Company and/or the Parent Entities will promptly make a public announcement of this fact.

Q: What is householding and how does it affect me?

A: The SEC permits companies to send a single set of certain disclosure documents to any household at which two or more stockholders reside, unless contrary instructions have been received, but only if the company provides advance notice and follows certain procedures. In such cases, each stockholder continues to receive a separate notice of the meeting and proxy card. This householding process reduces the volume of duplicate information and reduces printing and mailing expenses. We have not instituted householding for stockholders of record; however, certain banks, brokers or other nominees may have instituted householding for beneficial owners of Company common stock held through them. If your family has multiple accounts holding Company common stock, you may have already received a householding notification from your bank, broker or other nominee. Please contact your bank, broker or other nominee directly if you have any questions or require additional copies of this Proxy Statement. The bank, broker or other nominee will arrange for delivery of a separate copy of this Proxy Statement promptly upon your written or oral request. The Company will also deliver a separate copy of the notice or proxy materials to you if you contact us at the following address or telephone number: Investor Relations, Safeway Inc., 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, telephone: (925) 467-3790. You may decide at any time to revoke your decision to household, and thereby receive multiple copies, by contacting your bank, broker or other nominee.

Q: Who will solicit and pay the cost of soliciting proxies for the Annual Meeting?

A: The Company has engaged Georgeson Inc. and MacKenzie Partners, Inc. to assist in the solicitation of proxies for the Annual Meeting and provide related advice and informational support, for a services fee and the reimbursement of customary disbursements. The cost of this solicitation will be borne by the Company. The Company will pay a base fee to Georgeson Inc. not to exceed $17,000, plus reimbursement for out-of-pocket expenses, and will pay a retainer of $20,000, plus reimbursement for out-of-pocket expenses, and additional fees to be mutually agreed upon to MacKenzie Partners. The Company may also reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of Company common stock for their expenses in forwarding soliciting materials to beneficial owners of the common stock and in obtaining voting instructions from those owners. They will not be paid any additional amounts for soliciting proxies. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person.

Q: Who can help answer my questions?

A: If you have any questions about the Merger or how to submit your proxy, or if you need additional copies of this Proxy Statement or the enclosed proxy card, you should contact our proxy solicitors, Georgeson Inc. toll-free at (866) 767-8986, or MacKenzie Partners, Inc. toll-free at (800) 322-2885.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Proxy Statement and the documents incorporated by reference into this Proxy Statement contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are based on our current expectations and involve risks and uncertainties, which may cause results to differ materially from those set forth in the statements. No assurance can be given that any of the events anticipated by the forward-looking statements will transpire or occur. The forward-looking statements may include statements regarding actions to be taken by us. We undertake no obligation (and expressly disclaim any such obligation) to publicly update any forward-looking statement, whether as a result of new information, future events or otherwise that involve risks, uncertainties and assumptions. If such risks or uncertainties materialize or such assumptions prove incorrect, the results of the Company and its consolidated subsidiaries could differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. In many cases you can identify forward-looking statements by the use of words such as “believe,” “anticipate,” “intend,” “plan,” “estimate,” “may,” “could,” “predict,” “will,” “committed to,” “is,” “contemplate,” “likely,” “should,” or “expect” and similar expressions, although the absence of such words does not necessarily mean that a statement is not forward looking. For example, forward-looking statements include statements about the Company’s future financial and operating results, plans, expectations for potential payments, costs and expenses, interest rates, outcome of contingencies, business strategies and cost savings; any statements of the plans, strategies and objectives of management for future operations and the anticipated timing of filings, approvals and the closing of the Merger; any statements regarding future economic conditions or performance; statements of belief and any statement of assumptions underlying any of the foregoing. You should note that the discussion of the Company’s reasons for recommending approval and adoption of the Merger Agreement and the description of the Company’s financial advisors’ opinions contain forward-looking statements that describe beliefs, assumptions and estimates as of the indicated dates, and those forward-looking expectations may have changed as of the date of this Proxy Statement.

Neither the Company nor any other person can assume responsibility for the accuracy and completeness of forward-looking statements. There are various important factors that could cause actual results to differ materially from those in any such forward-looking statements, many of which are beyond the Company’s control. Risks, uncertainties and assumptions include, without limitation, the occurrence of any event, change or other circumstances that could give rise to the termination of the Merger Agreement; the possibility that various closing conditions for the Merger (including the stockholder approval) may not be satisfied or waived; the possibility of a failure to obtain, delays in obtaining or adverse conditions contained in any required regulatory or other approvals; the failure to obtain sufficient funds to close the Merger; the failure of the Merger to close for any other reason; the amount of fees and expenses related to the Merger; the diversion of the Board’s attention from ongoing business concerns; the effect of the announcement of the Merger on our business relationships, operating results and business generally, including our ability to retain key employees; the Merger Agreement’s contractual restrictions on the conduct of our business prior to the closing of the Merger; the possible adverse effect on our business and the price of Company common stock if the Merger is not completed in a timely matter or at all; the outcome of, or delays caused by, any legal proceedings, regulatory proceedings or enforcement matters that have been or may be instituted against us and others relating to the Merger; changes in laws or regulations; and changes in general economic conditions.

In addition, there is no assurance that any payments will be made with respect to the sales of the Casa Ley Interest and/or the PDC assets, including with respect to the CVRs after the closing of the Merger. The right to receive any future payments with respect to the sales of the Casa Ley Interest and/or the PDC assets, including with respect to the CVRs after the closing of the Merger, will be contingent on a number of factors, including the Company’s ability to sell all or a portion of the Casa Ley Interest and/or the PDC assets, and the amount of net proceeds realized. There can be no assurance as to the value of the Casa Ley Interest and/or PDC or that the

 

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Company’s stockholders will receive net proceeds in the amount of the value estimated in the joint press release previously issued by the Company, or any other amount.

The above risks and uncertainties are non-exhaustive and are in addition to the other risks that are set forth in the Company’s filings with the SEC, particularly under the heading “Risk Factors” in Part I, Item 1A of the Company’s Form 10-K for the fiscal year ended December 28, 2013 and filed with the SEC on February 26, 2014, as amended on April 25, 2014, which is incorporated by reference herein, and in other of the Company’s filings with the SEC from time to time, including Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which are available without charge at www.sec.gov. For additional information please see “Where You Can Find More Information” beginning on page 252.

 

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MARKET PRICE AND DIVIDEND INFORMATION

The Company common stock, $0.01 par value, is currently publicly traded on the NYSE under the symbol “SWY.” The following table sets forth the high and low sales prices per common share on the NYSE for the periods indicated.

 

     Low      High  

2014

     

Quarter 2 (12 weeks)

   $ 33.07       $ 34.45   

Quarter 1 (12 weeks)

     30.06         39.48   

2013

     

Quarter 4 (16 weeks)

   $ 25.85       $ 36.90   

Quarter 3 (12 weeks)

     22.35         26.89   

Quarter 2 (12 weeks)

     22.26         28.42   

Quarter 1 (12 weeks)

     17.08         25.92   

2012

     

Quarter 4 (16 weeks)

   $ 15.00       $ 19.36   

Quarter 3 (12 weeks)

     14.73         18.31   

Quarter 2 (12 weeks)

     17.53         22.21   

Quarter 1 (12 weeks)

     20.20         23.16   

There were 12,666 stockholders of record as of June 2, 2014; however, approximately 98.8% of the Company’s outstanding stock is held in “street name” by depositories or nominees on behalf of beneficial holders. The closing price per share of Company common stock, as reported on the New York Stock Exchange Composite Tape, was $34.30 at the close of business on June 2, 2014. This closing share price was after the completion of the Blackhawk Distribution on April 14, 2014.

The following table presents information regarding cash dividends paid on shares of Company common stock during fiscal 2014, 2013, 2012 and 2011.

 

     Date Paid      Record Date      Per-Share
Amounts
     Total      Year-to-Date
Total
 
     (dollars in millions, except per share amounts)  

2014

              

Quarter 2

     04/10/14         03/24/14       $ 0.2000       $ 46.2       $ 92.2   

Quarter 1

     01/09/14         12/19/13         0.2000         46.0         46.0   

2013

              

Quarter 4

     10/10/13         09/19/13       $ 0.2000       $ 49.1       $ 181.4   

Quarter 3

     07/11/13         06/20/13         0.2000         48.2         132.3   

Quarter 2

     04/11/13         03/25/13         0.1750         42.2         84.1   

Quarter 1

     12/31/12         12/17/12         0.1750         41.9         41.9   

2012

              

Quarter 4

     10/11/12         09/20/12       $ 0.1750       $ 41.9       $ 163.9   

Quarter 3

     07/12/12         06/21/12         0.1750         41.9         122.0   

Quarter 2

     04/12/12         03/29/12         0.1450         36.3         80.1   

Quarter 1

     01/12/12         12/22/11         0.1450         43.8         43.8   

2011

              

Quarter 4

     10/13/11         09/22/11       $ 0.1450       $ 49.3       $ 188.0   

Quarter 3

     07/14/11         06/23/11         0.1450         50.7         138.7   

Quarter 2

     04/14/11         03/24/11         0.1200         43.8         88.0   

Quarter 1

     01/13/11         12/23/10         0.1200         44.2         44.2   

 

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Under the terms of the Merger Agreement, the Company is prohibited from authorizing, declaring, setting aside or paying any dividend or other distribution, other than quarterly dividends per share of $0.20, $0.23, $0.23, $0.23 and $0.23, respectively, or of certain net proceeds from sales of the Casa Ley Interest or the PDC assets, subject to certain exceptions. Although the Company expects to continue to pay quarterly dividends on its common stock, the payment of future dividends is at the discretion of the Board and will depend upon the Company’s earnings, capital requirements, financial condition and other factors.

In addition to the dividends discussed above, the Board has declared a quarterly dividend of $0.23 per share of Company common stock payable to holders of record on June 19, 2014 to be paid on July 10, 2014.

 

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THE ANNUAL MEETING

We are furnishing this Proxy Statement to the Company’s stockholders as part of the solicitation of proxies by the Board for use at the Annual Meeting.

Date, Time and Place

We will hold the Annual Meeting at our corporate headquarters, 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, on July 25, 2014, at 1:30 p.m., Pacific time, and any adjournments or postponements thereof. For your convenience, we are also pleased to offer a live audio webcast of our Annual Meeting on the Investor Relations section of our website at www.safeway.com/investor_relations.

Purpose of the Annual Meeting

The Annual Meeting is being held for the following purposes:

 

    to approve and adopt the Merger Agreement;

 

    to consider and vote on a non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”);

 

    to approve the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

    to elect as directors the nine nominees named in this Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

    to consider and vote on a non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”);

 

    to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

    to consider and vote on a stockholder proposal regarding labeling products that contain genetically engineered ingredients, if properly presented at the Annual Meeting;

 

    to consider and vote on a stockholder proposal regarding extended producer responsibility, if properly presented at the Annual Meeting; and

 

    to transact such other business as may properly come before the meeting and any adjournments or postponements.

A copy of the Merger Agreement is attached to this Proxy Statement as Annex A, a copy of Amendment No. 1 to the Merger Agreement is attached to this Proxy Statement as Annex B and a copy of Amendment No. 2 to the Merger Agreement is attached to this Proxy Statement as Annex C.

Adjournments

Although it is not currently expected, the Annual Meeting may be adjourned to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement. Any adjournment may be made without notice, other than by an announcement made at the Annual Meeting, and the record date will not change due to an adjournment unless the date of the adjourned meeting is more than 30 days after the date for which the meeting was originally noticed or the Board, in its discretion, establishes a new record date. In order for the Annual Meeting to be adjourned, if necessary or appropriate, to solicit additional

 

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proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement, the proposal to approve the adjournment of the Annual Meeting must receive the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present).

Any adjournment of the Annual Meeting to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement will allow stockholders who have already sent in their proxies to revoke them at any time prior to their use at the Annual Meeting, as adjourned, provided that such revocation is in compliance with the instructions (including as to timing) set forth in “—Revocation of Proxy” below.

Recommendation of the Board

The Board, after careful consideration, unanimously determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement are fair to, advisable and in the best interests of the Company and its stockholders and recommended that the Company’s stockholders approve and adopt the Merger Agreement at the Annual Meeting.

The Board unanimously recommends that our stockholders vote:

 

    “FOR” the approval and adoption of the Merger Agreement;

 

    “FOR” the non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”);

 

    “FOR” the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

    “FOR” the proposal to elect as directors the nine nominees named in this Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

    “FOR” the non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”);

 

    “FOR” the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

    “AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding labeling products that contain genetically engineered ingredients; and

 

    “AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding extended producer responsibility.

Vote Required

Approval and Adoption of the Merger Agreement

To approve and adopt the Merger Agreement, the holders as of the record date of at least a majority of the outstanding shares of Company common stock must vote such shares “FOR” the proposal to approve and adopt the Merger Agreement. At the close of business on June 2, 2014, the record date for the Annual Meeting, 230,399,204 shares of Company common stock were outstanding and entitled to vote at the Annual Meeting.

 

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If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the proposal to approve and adopt the Merger Agreement, it will have the same effect as a vote “AGAINST” this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, or if you do not provide your broker, dealer, commercial bank, trust company or other nominee with voting instructions, your shares of Company common stock will not be voted, and it will have the same effect as a vote “AGAINST” this proposal.

Approval of the Merger-Related Compensation Proposal

The approval of the non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A majority of the votes cast means that the number of votes cast “FOR” the proposal must exceed the number of votes cast “AGAINST” the proposal.

If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger, your shares of Company common stock will have no effect on this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, or if you do not provide your broker, dealer, commercial bank, trust company or other nominee with voting instructions, your shares of Company common stock will have no effect on this proposal.

Approval of the Adjournment of the Annual Meeting

The approval of the proposal to adjourn the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement, requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A majority of the votes cast means that the number of votes cast “FOR” the proposal must exceed the number of votes cast “AGAINST” the proposal.

If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the proposal to adjourn the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement, your shares of Company common stock will have no effect on this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, or if you do not provide your broker, dealer, commercial bank, trust company or other nominee with voting instructions, your shares of Company common stock will have no effect on this proposal.

Approval of the Election of Directors

The approval of the proposal to elect as directors the nine nominees named in this Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified, requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A majority of the votes cast means that the number of votes cast “FOR” a director candidate must exceed the number of votes cast “AGAINST” that candidate.

If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the proposal to elect as directors the nine nominees named in this Proxy Statement to

 

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serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified, your shares of Company common stock will have no effect on this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, or if you do not provide your broker, dealer, commercial bank, trust company or other nominee with voting instructions, your shares of Company common stock will have no effect on this proposal.

Approval of the Compensation Proposal for Our Named Executive Officers (“Say on Pay Proposal”)

The approval of the non-binding, advisory proposal to approve the compensation of our named executive officers, as such compensation is described under “Compensation Discussion and Analysis” beginning on page 192, the tabular disclosure regarding such compensation and the accompanying narrative disclosure, requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A majority of the votes cast means that the number of votes cast “FOR” the proposal must exceed the number of votes cast “AGAINST” the proposal.

If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the non-binding, advisory proposal to approve the compensation of our named executive officers, your shares of Company common stock will have no effect on this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, or if you do not provide your broker, dealer, commercial bank, trust company or other nominee with voting instructions, your shares of Company common stock will have no effect on this proposal.

Approval of Our Independent Registered Public Accounting Firm

The approval of the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014 requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A majority of the votes cast means that the number of votes cast “FOR” the proposal must exceed the number of votes cast “AGAINST” the proposal.

If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014, your shares of Company common stock will have no effect on this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, your shares of Company common stock will have no effect on this proposal. If you do not provide your broker, dealer, commercial bank, trust company or other nominee with voting instructions, under NYSE rules, your broker, dealer, commercial bank, trust company or other nominee will have discretionary authority to vote on this proposal.

Approval of the Genetically Engineered Labeling Stockholder Proposal

The approval of the stockholder proposal regarding labeling products that contain genetically engineered ingredients requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A majority of the votes cast means that the number of votes cast “FOR” the proposal must exceed the number of votes cast “AGAINST” the proposal.

If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the stockholder proposal regarding labeling products that contain genetically engineered ingredients, your shares of Company common stock will have no effect on this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, or if you do not provide your broker, dealer,

 

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commercial bank, trust company or other nominee with voting instructions, your shares of Company common stock will have no effect on this proposal.

Approval of the Extended Producer Responsibility Stockholder Proposal

The approval of the stockholder proposal regarding extended producer responsibility requires the affirmative vote of a majority of the votes cast by the holders as of the record date of the shares of Company common stock present in person or by proxy and entitled to vote at the Annual Meeting (provided a quorum is present). A majority of the votes cast means that the number of votes cast “FOR” the proposal must exceed the number of votes cast “AGAINST” the proposal.

If you vote “ABSTAIN” by proxy or in person at the Annual Meeting, or if you attend the Annual Meeting in person and fail to vote on the stockholder proposal regarding extended producer responsibility, your shares of Company common stock will have no effect on this proposal. If you fail to submit a proxy and do not attend the Annual Meeting in person, or if you do not provide your broker, dealer, commercial bank, trust company or other nominee with voting instructions, your shares of Company common stock will have no effect on this proposal.

Proxies without Instructions

If you properly transmit your proxy, but do not indicate how you want to vote, your proxy will be voted:

 

    FOR” the approval and adoption of the Merger Agreement;

 

    FOR” the non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”);

 

    FOR” the proposal to approve the adjournment of the Annual Meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the Annual Meeting to approve and adopt the Merger Agreement;

 

    FOR” the proposal to elect as directors the nine nominees named in this Proxy Statement to serve until the closing of the Merger or, if the Merger is not completed, for a term of one year and until their successors are elected and qualified;

 

    FOR” the non-binding, advisory proposal to approve the compensation of our named executive officers (“say on pay proposal”);

 

    FOR” the proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014;

 

    AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding labeling products that contain genetically engineered ingredients; and

 

    AGAINST” the stockholder proposal, if properly presented at the Annual Meeting, regarding extended producer responsibility.

Stock Ownership and Interests of Certain Persons

As of June 2, 2014, the record date for the Annual Meeting, our directors and current executive officers beneficially owned, in the aggregate, 4,560,263 shares of Company common stock, or collectively approximately 2.0% of the outstanding shares of Company common stock.

Certain members of our management and the Board have interests that may be different from, or in addition to, those of our stockholders generally. For more information, please see “Proposal 1 – The Merger—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 110.

 

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Record Date; Quorum

Only stockholders of record at the close of business on June 2, 2014, the record date for the Annual Meeting, will be entitled to vote at the Annual Meeting. At the close of business on that date, there were 230,399,204 shares of Company common stock issued and outstanding and entitled to vote. Each such issued and outstanding share of Company common stock is entitled to one vote. A majority of the issued and outstanding shares of Company common stock represented in person or by proxy at the Annual Meeting will constitute a quorum for the transaction of business. Shares represented by any proxies marked with abstentions or represented by any “broker non-votes” (as described below in “—Voting”) will be counted as shares that are present and entitled to vote for purposes of determining the presence of a quorum.

Voting

If shares of Company common stock are not voted in person, they cannot be voted on your behalf unless a proxy is given. Subject to the limitations described below, you may vote by proxy by telephone or over the internet by following the instructions provided on the proxy card, or you can also vote by mail pursuant to instructions provided on the proxy card.

Voting by Telephone or Through the Internet. If you are a registered stockholder (that is, if you own Company common stock in your own name and not through a broker, bank or other nominee that holds Company common stock for your account in a “street name” capacity), you may vote by proxy by using either the telephone or Internet methods of voting. Proxies submitted by telephone or through the Internet must be received by 8:59 p.m., Pacific time, on July 24, 2014. Please see the proxy card for instructions on how to access the telephone and Internet voting systems. If your shares of Company common stock are held in “street name” for your account, your broker, bank or other nominee will advise you whether you may vote by telephone or through the Internet.

Voting by Proxy Card. You may vote by mail pursuant to instructions provided on the proxy card. Proxies submitted by mail must be received by 8:59 p.m., Pacific time, on July 24, 2014. When you return a proxy card that is properly signed and completed, the shares of Company common stock represented by your proxy will be voted as you specify on the proxy card. If you own Company common stock through a broker, bank or other nominee that holds shares of Company common stock for your account in a “street name” capacity, you should follow the instructions provided by your nominee regarding how to instruct your nominee to vote your shares.

For those stockholders who are participants in any of Safeway’s 401(k) plans, your proxy also serves as a voting instruction to the 401(k) Plan Trustee for the shares of Company common stock held in the 401(k) plans as of June 2, 2014, the record date for the Annual Meeting, provided that instructions are furnished over the Internet or by telephone by 8:59 p.m., Pacific time, on July 20, 2014, or that a proxy card is signed, returned and received by July 20, 2014.

Votes cast at the Annual Meeting will be tabulated by the inspector of election for the Annual Meeting. Shares of Company common stock represented by any proxies marked with abstentions or represented by any “broker non-votes” will be counted as shares of Company common stock that are present and entitled to vote for purposes of determining the presence of a quorum. Broker non-votes occur when a broker, bank or other nominee holding shares of Company common stock for your account does not vote on a particular matter because the nominee does not have discretionary authority to vote on such matter and has not received voting instructions from you.

 

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The following table summarizes the votes required for passage of each proposal and the effect of abstentions and broker non-votes.

 

Proposal
Number

  

Item

  

Vote Required
for Approval

  

Abstentions

  

Broker
Non-Votes

1    Approval and adoption of the Merger Agreement    Majority of the outstanding shares of Company common stock    Vote Against    Vote Against
2    A non-binding, advisory proposal to approve the compensation that may be paid or become payable to the Company’s named executive officers in connection with the closing of the Merger (the “Merger-related compensation proposal”)   

Majority of the

votes cast

   Not voted    Not voted
3    Approval of the adjournment of the Annual Meeting   

Majority of the

votes cast

   Not voted    Not voted
4    Election of the directors named in this Proxy Statement   

Majority of the

votes cast

   Not voted    Not voted
5    Advisory vote to approve the compensation of our named executive officers (“say on pay proposal”)   

Majority of the

votes cast

   Not voted    Not voted
6    Ratification of appointment of Deloitte & Touche LLP as our independent registered public accounting firm for fiscal year 2014   

Majority of the

votes cast

   Not voted   

Discretionary

vote

7    Stockholder proposal regarding labeling products that contain genetically engineered ingredients   

Majority of the

votes cast

   Not voted    Not voted
8    Stockholder proposal regarding extended producer responsibility   

Majority of the

votes cast

   Not voted    Not voted

Revocation of Proxy

A stockholder giving a proxy pursuant to the present solicitation may revoke it at any time before it is exercised by giving a subsequent proxy or by delivering to the Secretary of the Company a written notice of revocation prior to the voting of the proxy at the Annual Meeting. If you attend the Annual Meeting and inform the Secretary of the Company in writing that you wish to vote your shares of Company common stock in person, your proxy will not be used. All shares of Company common stock represented by each properly submitted and unrevoked proxy will be voted unless the proxy is received in such form or at such time as to render it unusable. All shares of Company common stock properly voted in accordance with the procedures set forth in the notice and this Proxy Statement will be voted in accordance with your instructions.

Solicitation of Proxies

The cost of this solicitation will be borne by the Company. In addition to the mailing of these proxy materials, the solicitation of proxies or votes may be made in person, by telephone or by electronic communication by certain of our officers and regular employees who will not receive additional compensation for such solicitation. Brokers, banks and other nominees will be reimbursed for out-of-pocket expenses incurred in obtaining proxies or authorizations from the beneficial owners of Company common stock. In addition, we have retained Georgeson Inc. and MacKenzie Partners, Inc. to assist with the solicitation of proxies for the Annual Meeting. The Company will pay a base fee to Georgeson Inc. not to exceed $17,000, plus reimbursement

 

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for out-of-pocket expenses, and to MacKenzie Partners, Inc., a retainer of $20,000, plus reimbursement for out-of-pocket expenses and additional fees to be mutually agreed upon.

Annual Meeting Admission

You are entitled to attend the Annual Meeting only if you were a holder of Company common stock or joint holder of Company common stock as of the close of business on June 2, 2014 or you hold a valid proxy for the Annual Meeting. You should be prepared to present photo identification for admittance. In addition, if you are a stockholder of record or hold your shares through a Safeway benefit plan, your name will be verified against the list of stockholders of record or plan participants as of June 2, 2014, the record date of the Annual Meeting, prior to your being admitted to the Annual Meeting. If you are not a stockholder of record but hold shares of Company common stock through a broker, bank or other nominee (i.e. in “street name”), you should provide proof of your beneficial ownership of shares of Company common stock as of the record date of the Annual Meeting, such as an account statement showing your ownership of Company common stock as of June 2, 2014, a copy of the notice of this Annual Meeting or voting instruction card, if any, provided by your broker, bank or other nominee, or other similar evidence of ownership. If you do not provide photo identification or comply with the other procedures outlined above upon request, you will not be admitted to the Annual Meeting.

The Annual Meeting will begin promptly at 1:30 p.m., Pacific time. Check-in will begin at 12:30 p.m., Pacific time, and you should allow ample time for the check-in procedures.

Other Matters

The purpose of the meeting and the matters to be acted upon are set forth in the attached Notice of Annual Meeting of Stockholders. As of the date of this Proxy Statement, management knows of no other business to be presented for consideration at the Annual Meeting. However, if any such other business shall properly come before the Annual Meeting, votes will be cast pursuant to properly submitted proxies with respect to any such other business in accordance with the best judgment of the persons acting under said proxies.

Householding of Annual Meeting Materials

Some banks, brokers and other nominees may be participating in the practice of “householding” proxy statements and annual reports. This means that only one notice or one set of proxy materials may have been sent to multiple stockholders in your household. Please contact your bank, broker or other nominee directly if you have any questions or require additional copies of this Proxy Statement. We will also promptly deliver a separate copy of the notice or proxy materials to you if you contact us at the following address or telephone number: Investor Relations, Safeway Inc., 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, telephone: (925) 467-3790. If you would like to receive separate copies of the notice or proxy materials in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker or other nominee.

Rights of Stockholders Who Object to the Merger

Stockholders are entitled to statutory appraisal rights under the DGCL in connection with the Merger. This means that you are entitled to have the value of your shares of Company common stock determined by the Court of Chancery of the State of Delaware, and to receive payment based on that valuation instead of receiving the Per Share Merger Consideration. The ultimate amount you would receive in an appraisal proceeding may be more than, the same as or less than the amount you would have received under the Merger Agreement.

To exercise your appraisal rights, you must submit a written demand for appraisal to us before the vote is taken on the Merger Agreement and you must NOT vote in favor of the approval and adoption of the Merger Agreement. Voting “AGAINST” the approval and adoption of the Merger Agreement or voting to “ABSTAIN” on that proposal is not sufficient to exercise your appraisal rights. Your failure to follow exactly the procedures specified under the DGCL will result in the loss of your appraisal rights. See “Proposal 1 – The Merger—

 

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Appraisal Rights” beginning on page 101 and the text of the Delaware appraisal rights statute, Section 262 of the DGCL, which is reproduced in its entirety as Annex D to this Proxy Statement.

Assistance

If you require assistance in completing your proxy card or have questions regarding the Annual Meeting, please contact our proxy solicitors, Georgeson Inc. toll-free at (866) 767-8986, or MacKenzie Partners, Inc. toll-free at (800) 322-2885.

 

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PROPOSAL 1—THE MERGER

The following is a description of the material aspects of the Merger. You are encouraged to read carefully the full text of the Merger Agreement attached to this Proxy Statement as Annex A, Amendment No. 1 to the Merger Agreement attached to this Proxy Statement as Annex B and Amendment No. 2 to the Merger Agreement attached to this Proxy Statement as Annex C because, together, they constitute the legal document that governs the Merger. The following description is subject to, and is qualified in its entirety by reference to, the Merger Agreement.

The Parties

Safeway Inc.

Safeway Inc. (“Safeway,” the “Company,” “we,” “us” or “our”) is one of the largest food and drug retailers in the United States, with 1,335 stores at year-end 2013. The Company’s U.S. retail operations are located principally in California, Hawaii, Oregon, Washington, Alaska, Colorado, Arizona, Texas and the Mid-Atlantic region. In support of its U.S. retail operations, the Company has an extensive network of distribution, manufacturing and food-processing facilities. Safeway’s operating strategy is to provide value to its customers by maintaining high store standards and a wide selection of high-quality products at competitive prices and is focused on differentiating its offering with high-quality perishables. For more information about us, please visit our website at www.safeway.com (the information available at our website address is not incorporated by reference into this report). See also, “Where You Can Find More Information.” Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “SWY.” The Company’s corporate headquarters are located at 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, and our telephone number is (925) 467-3000.

AB Acquisition LLC and Albertson’s Holdings LLC

AB Acquisition LLC (“Ultimate Parent”) is a holding company owned by Cerberus Capital Management, L.P. (“Cerberus”), Kimco Realty Corporation, Klaff Realty LP, Lubert-Adler Partners LP, and Schottenstein Stores Corporation or, in each case, by affiliates, affiliated funds, managed accounts and co-investors thereof and certain current members of management of the Parent Entities (as defined below). Albertson’s Holdings LLC (“Parent”) is a holding company owned by Ultimate Parent. The corporate offices of Ultimate Parent and Parent are located at 250 Parkcenter Blvd. Boise, Idaho 83706, and the telephone number of Ultimate Parent and Parent is (208) 395-6200.

New Albertson’s, Inc.

New Albertson’s, Inc. (“NAI”), is an indirect wholly-owned subsidiary of Ultimate Parent. NAI operates 445 stores under the banner names Jewel-Osco, Shaw’s, Acme and Star Market and four distribution centers. The operations of NAI are located in 12 states, predominately across the Midwestern, Northeastern and Mid-Atlantic U.S. The corporate offices of NAI are located at 250 Parkcenter Blvd. Boise, Idaho 83706, and the telephone number of NAI is (208) 395-6200.

Albertson’s LLC

Albertson’s LLC (“Albertson’s LLC”) operates 630 grocery stores under the banner names Albertsons, United Supermarkets, Market Street and Amigos as well as 11 distribution centers. The operations of Albertson’s LLC are located in 16 states, predominately across the Western and Southern U.S. Albertson’s LLC is a direct, wholly-owned subsidiary of Parent. The corporate offices of Albertson’s LLC are located at 250 Parkcenter Blvd. Boise, Idaho 83706, and the telephone number of Albertson’s LLC is (208) 395-6200.

Saturn Acquisition Merger Sub, Inc.

Saturn Acquisition Merger Sub, Inc. (“Merger Sub” and together with Ultimate Parent, Parent and Albertson’s LLC, the “Parent Entities”) was formed by Parent solely for the purpose of entering into the

 

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Agreement and Plan of Merger with Ultimate Parent, Parent, Albertson’s LLC and the Company, dated March 6, 2014 and amended on April 7, 2014 pursuant to Amendment No. 1 (“Amendment No. 1”) and on June 13, 2014 pursuant to Amendment No. 2 (“Amendment No. 2”) (as amended through the applicable dates of reference herein, the “Merger Agreement”), and consummating the transactions contemplated by the Merger Agreement. Merger Sub is wholly-owned by Parent and has not engaged in any business except for activities incidental to its formation and in connection with the transactions contemplated by the Merger Agreement. Upon the completion of the Merger (as defined below), Merger Sub will cease to exist.

Overview of the Transaction

On March 6, 2014, the Company entered into the Merger Agreement with the Parent Entities providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of Parent. The following will occur with the Merger:

 

    each share of Company common stock issued and outstanding immediately prior to the closing of the Merger (other than (1) shares held by any Parent Entity or any of their affiliates, (2) treasury shares and (3) shares owned by stockholders who have perfected, and have not withdrawn a demand for or lost the right to, appraisal rights under the Delaware General Corporation Law (the “DGCL”)) will be converted into the right to receive (i) $32.50 in cash (the “Initial Cash Merger Consideration”), (ii) a pro-rata portion of any net proceeds with respect to certain sales of (x) Safeway’s 49% interest (the “Casa Ley Interest”) in Casa Ley, S.A. de C.V., a Mexico-based food and general merchandise retailer (“Casa Ley”) and (y) Safeway’s real-estate development subsidiaries Property Development Centers, LLC and PDC I, Inc., which will own certain shopping centers and related Safeway stores (“PDC”), (iii) a pro-rata portion of certain after-tax amounts received by the Company as dividends or distributions in respect of the Casa Ley Interest or that are paid from the operating earnings of PDC, (iv) if the closing of the Merger occurs after March 5, 2015, $0.005342 per day for each day from (and including) March 5, 2015 through (and including) the closing of the Merger (the “Additional Cash Merger Consideration”), and (v) if the sale of the Casa Ley Interest and/or the PDC assets are not fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, (x) one contingent value right relating to the sale of any remaining Casa Ley Interest and deferred consideration (a “Casa Ley CVR”) and/or (y) one contingent value right relating to the sale of any remaining PDC assets and deferred consideration (a “PDC CVR”). We refer to the amounts in (i), (ii), (iii), (iv) and (v) above as the “Per Share Merger Consideration” and the amounts in (i), (ii), (iii) and (iv) above as the “Per Share Cash Merger Consideration”). See “The Merger Agreement—Per Share Merger Consideration” beginning on page 120 for additional information. Any amounts to be received in connection with the Casa Ley CVR and/or the PDC CVR, and the timing of any payments of any such amounts, are contingent upon the occurrence of certain events which may or may not occur. See “Casa Ley Contingent Value Rights Agreement—Payment Not Certain” beginning on page 160 and “PDC Contingent Value Rights Agreement—Payment Not Certain” beginning on page 168. You are advised to approve and adopt the Merger Agreement only if you are willing to assume the risk that these contingent events may not occur and that there may be no cash consideration ultimately paid to you in excess of $32.50 per share of Company common stock.

 

    all shares of Company common stock so converted will, at the closing of the Merger, be cancelled, and each holder of a certificate representing any shares of Company common stock shall cease to have any rights with respect thereto, except the right to receive the Per Share Merger Consideration upon surrender of such certificate (if such shares are certificated);

 

    each restricted share of Company common stock that is outstanding and that was granted pursuant to any Company Equity Incentive Plan whether or not then exercisable or vested, shall automatically vest and all restrictions thereon shall lapse, be cancelled and converted into the right to receive the Per Share Merger Consideration;

 

   

each outstanding performance share award covering shares of Company common stock (each, a “Performance Share Award”) will vest at the target levels specified for each such award and will be

 

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cancelled in exchange for (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Company common stock subject to such Performance Share Award (after taking into account any vesting that occurs in connection with the preceding clause) and (B) the Per Share Cash Merger Consideration and (ii) in the event that the sale of the Casa Ley Interest and/or the PDC assets, as applicable, have not been fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each vested share of Company common stock subject to such Performance Share Award;

 

    each outstanding restricted stock unit covering shares of Company common stock (each, a “Restricted Stock Unit”), that was granted under any Company Equity Incentive Plan, whether or not then vested, shall be accelerated, vested and cancelled in exchange for the right to receive (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Company common stock subject to such Restricted Stock Unit and (B) the Per Share Cash Merger Consideration; and (ii) in the event that the sale of the Casa Ley Interest and/or the PDC sale, as applicable, have not been fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or PDC, one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each vested share of Company common stock subject to such Restricted Stock Unit;

 

    each outstanding, unexpired and unexercised option to purchase shares of Company common stock (each, a “Company Option”), that was granted under any equity incentive plan of the Company, whether or not then exercisable or vested, shall be accelerated, vested and cancelled and converted into the right to receive, (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the total number of shares of Company common stock subject to such Company Option as of immediately prior to the effective time of the Merger and (B) the excess, if any, of the Per Share Cash Merger Consideration over the exercise price per share of Company common stock (the “Option Price”) of such Company Option (the “Option Payment”). In addition, if Casa Ley CVRs and PDC CVRs, as applicable, are issued to the Company’s stockholders, then each Company Option shall be eligible to receive one Casa Ley CVR and one PDC CVR, as applicable, in respect of each share of Company common stock subject to such cancelled Company Option that has an Option Price less than the Per Share Cash Merger Consideration; and

 

    all shares credited in the “stock credit accounts” under the Deferred Compensation Plan for Directors (“DCP”) and the Deferred Compensation Plan for Directors II (“DCPII”) shall be cancelled and, in exchange therefor, such accounts shall be credited with (i) an amount in cash equal to the product of (A) the number of shares of Company common stock credited to each such “stock credit account” and (B) the Per Share Cash Merger Consideration; (ii) in the event that a sale of all of the Casa Ley Interest has not been consummated prior to the effective time, one Casa Ley CVR in respect of each share of Company common stock credited to each such “stock credit account;” and (iii) in the event that a sale of all the PDC assets has not been consummated prior to the effective time, one PDC CVR in respect of each share of Company common stock credited to each such “stock credit account.” All amounts credited under the DCP and the DCPII shall continue to be held and paid at such times and in accordance with the terms of the plans and any deferral and distribution elections made thereunder.

Following and as a result of the Merger:

 

    Company stockholders will no longer have any interest in, and will no longer be stockholders of, the Company;

 

    shares of Company common stock will no longer be listed on the NYSE, and price quotations with respect to shares of Company common stock in the public market will no longer be available; and

 

    the registration of shares of Company common stock under the Exchange Act, will be terminated.

 

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Management and Board of Directors of the Surviving Corporation

The board of directors of the surviving corporation will, immediately after the effective time of the Merger, consist of the directors of Merger Sub until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal. The officers of the surviving corporation will, from and after the effective time of the Merger, be the officers of the Company until their successors have been duly appointed and qualified or until their earlier death, resignation or removal.

Background of the Merger

The grocery market has become increasingly competitive, in part as a result of the expansion of many different retail food channels in the geographic regions in which Safeway operates. The Board and management regularly review, consider and assess Safeway’s long-term strategic plan, financial performance and operations, as well as industry conditions, with the goal of maximizing stockholder value. The Board’s ongoing strategic review has included the consideration of potential business combinations, acquisitions, divestitures and financial and strategic alternatives and has led Safeway to engage in a number of strategic transactions, including with respect to its gift card distribution subsidiary, Blackhawk, and its Canadian division. Safeway involved Goldman Sachs, one of its longstanding financial advisors, in aspects of this review with respect to its Canadian operations and Blackhawk.

Safeway formed Blackhawk in 2006 to establish a network that offers a broad range of gift cards in Safeway stores and other retailers. Blackhawk has become a leading prepaid payment network utilizing proprietary technology to offer a broad range of gift cards, other prepaid products and payments services in the United States and 20 other countries. Blackhawk is one of the largest third-party distributors of gift cards in the world based on the total value of funds loaded on the cards its distributes. Its network connects to more than 650 content providers and over 180,000 active retail distribution locations. With Blackhawk having achieved this significant growth, in 2013, the Board determined to pursue an initial public offering (“IPO”) of shares of Blackhawk Class A common stock. The Board believed this would establish and increase the market value of Safeway’s ownership of Blackhawk, as reflected in the price per share of Company common stock, and would enable Safeway to realize cash for some of its equity in Blackhawk. In April 2013, Safeway sold approximately $265 million of shares of Blackhawk Class A common stock in the IPO, retaining an ownership stake of approximately 72% in Blackhawk.

Another area of Safeway’s strategic focus was its Canadian operations, where based on its review, Safeway determined that a sale of these operations would maximize value to its stockholders. Safeway’s Canadian business consisted of 223 grocery stores and 12 manufacturing plants, generated revenues in 2012 of $6.7 billion and was one of the leading grocery chains in western Canada. In 2012, Safeway recognized that the prices being paid for grocery chains in Canada were based on EBITDA multiples that were greater than the EBITDA multiples at which Safeway and other U.S. grocery chains were valued in the public trading markets. Safeway believed that its Canadian operations could be particularly attractive to one or more Canadian strategic companies, and that one of those companies might be willing to pay an attractive price because of synergies. In late 2012 and early 2013, Safeway was in contact with various parties who might be interested in acquiring its Canada operations. In June 2013, Safeway entered into a definitive agreement to sell substantially all of the assets of its operations in Canada (the “Canadian Sale”) to Sobeys Inc., Canada’s second largest grocery chain, for C$5.8 billion. Safeway announced that it planned to use the proceeds from the sale to pay down $2.0 billion of debt, with the majority of the remainder to be used to buy back shares of Company common stock and some of the proceeds contemplated to be used to invest in potential growth opportunities.

While Safeway has engaged in strategic transactions to help maximize stockholder value, it has also implemented a number of strategies designed to increase sales and meet the competitive pressures facing the grocery market. Over the past few years, Safeway continued to carry out its remodeling program to convert its stores to its “lifestyle” format. Safeway also developed and continued to expand its consumer private label brands focused on health and wellness such as O Organics, Eating Right and Open Nature. In 2011, Safeway initiated Just for U, a personalized, digital marketing platform. Safeway implemented this program in all U.S. divisions in 2012.

 

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In 2012, Safeway also introduced a new fuel rewards program. As a result of these efforts, and after many years of negative same store sales, Safeway recently began to show positive growth in its same store sales.

Safeway also has focused on how best to optimize its core grocery business in its various geographic regions, particularly those regions where increased competition from various formats had significantly and adversely affected operating results. The Board periodically has reviewed its various operating regions to assess whether Safeway should consider sales or acquisitions in order to maximize stockholder value. Safeway had been incurring losses in its Dominick’s Finer Foods division in the Chicago region, and in 2013, following the Board’s review, Safeway began exploring the possibility of exiting this market.

In late August 2013, Robert Miller, the Chief Executive Officer of Albertson’s LLC, contacted Robert Edwards, Safeway’s Chief Executive Officer, to make an informal inquiry as to whether Safeway might want to discuss possible strategic transactions, including potentially a purchase or sale of certain assets, or a merger of Safeway and Albertson’s LLC. In early September, advisors for Cerberus and Albertson’s LLC began a preliminary antitrust analysis concerning a potential merger of Safeway and Albertson’s LLC, and representatives of Cerberus, which is the largest equityholder of Ultimate Parent, contacted Goldman Sachs to inquire whether Safeway would be interested in discussing a potential transaction involving Albertson’s LLC. In early September 2013, Cerberus requested that Goldman Sachs act as its financial advisor in connection with a potential transaction with Safeway. Goldman Sachs declined the request and described its longstanding relationship with Safeway and the expectation that if Safeway determined it would be interested in a dialogue, Goldman Sachs would anticipate being asked to represent Safeway. After obtaining authorization of Safeway’s Non-Executive Chairman, T. Gary Rogers (the “Board Chairman”), Mr. Edwards asked Goldman Sachs to respond to Cerberus on behalf of Safeway to request high level financial information about Albertson’s LLC for purposes of evaluating the possibility of a business combination. Goldman Sachs was asked to make this request given Goldman Sachs’ mergers and acquisitions and financial expertise. The Board did not discuss or consider retaining any financial advisor other than Goldman Sachs given Goldman Sachs’ longstanding role as Safeway’s financial advisor, including with respect to other strategic initiatives, and their familiarity with Safeway’s business and the ongoing strategic initiatives. Also, talks regarding whether any transaction may occur or the form of any such transaction were premature.

On September 5, 2013, Mr. Edwards and Mr. Miller met and had a general conversation about the possibility of pursuing a strategic transaction. Although the parties discussed possible acquisition transactions, Mr. Miller indicated that his preference would be to discuss a merger transaction because he believed it would produce substantial synergies. Thereafter, Safeway and NAI and Cerberus executed a confidentiality agreement, and Cerberus provided Safeway with limited financial information and a preliminary estimate of synergies based on publicly available information, and counsel to Cerberus and Albertson’s LLC provided Safeway’s antitrust counsel with a preliminary antitrust analysis. During the course of the meeting, Mr. Edwards indicated that Safeway may want to sell certain of the Dominick’s Finer Food stores in the Chicago market, and Mr. Miller expressed interest in the potential acquisition of the stores. On September 10, 2013, Safeway and NAI entered into a confidentiality agreement relating to the Dominick’s Finer Food stores.

On September 16, 2013, the Executive Committee of the Board (the “Executive Committee”) met and discussed strategic initiatives related to Safeway’s different geographic regions. The Executive Committee discussed the possibility of a strategic transaction with Albertson’s LLC or other grocery chains. The Executive Committee concluded that it was not the right time to pursue a transaction involving the sale of the entire company because Safeway was in the process of implementing a variety of strategic initiatives, the results of which were not yet reflected in the value of the Company’s common stock, which closed at $28.24 on September 16, 2013. The Executive Committee and management were focused on selling stores or other assets in the Chicago region in order to eliminate recurring losses. Goldman Sachs orally informed the Executive Committee with respect to certain prior investment banking engagements and relationships that Goldman Sachs had with Ultimate Parent and its affiliates and Cerberus and its affiliates and portfolio companies.

Later on September 16, 2013, JANA Partners informed Safeway that it had acquired more than 5% of Safeway’s outstanding shares. Over the prior months, Safeway had engaged in dialogue with JANA Partners and

 

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other stockholders to understand their views and to help them understand Safeway’s business and strategy for maximizing stockholder value. Having recently undertaken a number of strategic initiatives, including an IPO of the shares of Blackhawk Class A common stock and the pending Canadian Sale, the Board wanted to ensure that Safeway could continue to implement its strategic plan and maximize the long-term value of Safeway for all stockholders. The Board was concerned about the possibility that its strategic efforts might be interrupted before all stockholders had a chance to realize that value. In response to this concern, the Board met that evening and adopted the Company Rights Agreement, which has a one-year expiration date from September 16, 2013, in order to protect the ability of all Safeway stockholders to realize the long-term value of the ongoing initiatives. On September 17, 2013, JANA Partners filed a Schedule 13D disclosing that it beneficially owned approximately 6.2% of Safeway’s outstanding stock. That day the stock closed at $30.99 per share, an approximately 10% increase over the previous closing price of $28.24 per share.

On September 17, 2013, Mr. Miller and Lenard Tessler, the Co-Head of Global Private Equity and Senior Managing Director of Cerberus, called Mr. Edwards again to express that Albertson’s LLC had an interest in exploring an acquisition of Safeway in a merger. Mr. Edwards did not respond to Mr. Tessler’s expression of interest. Later that day, representatives of Goldman Sachs spoke with representatives of Cerberus to indicate that Safeway was not interested in pursuing a transaction involving the entire company. On September 18, 2013, Mr. Edwards contacted Mr. Miller to inquire whether NAI would be interested in purchasing some of the Dominick’s Finer Foods stores in the Chicago region. Mr. Miller was receptive to that suggestion, and thereafter Safeway and NAI engaged in negotiations regarding a potential sale of certain Dominick’s Finer Foods stores in the Chicago region.

In October 2013, Greenhill approached Safeway to express interest in acting as a second financial advisor to Goldman Sachs in connection with a potential transaction, noting its experience in acting as a secondary advisor on the Supervalu transaction earlier that year.

On October 10, 2013, NAI acquired a Safeway subsidiary that owns four Dominick’s Finer Foods stores. Later that day, Safeway announced its earnings for the third quarter of its 2013 fiscal year. Safeway’s press release announced that Safeway had decided to exit the Chicago market and to focus on operating in other regions where its business was stronger. Safeway also announced that as a result of the sale to NAI of the subsidiary that owns Dominick’s Finer Foods stores, Safeway would realize a cash tax benefit of $400 million to $450 million. Subsequently, NAI and Safeway had periodic discussions about the potential acquisition by NAI of other Dominick’s Finer Foods stores from Safeway.

On October 17, 2013, the Board held a regular meeting. The Board reviewed a range of strategic options, including continuing to implement Safeway’s business plan as a standalone company, pursuing a transaction for the sale of Safeway with Albertson’s LLC, another strategic entity or a private equity firm, separating Blackhawk possibly through a spin-off, split-off or sale, and using the cash from the pending Canadian Sale to return capital to the stockholders and retire outstanding debt.

The Board reviewed the potential rationale and other considerations for each of these strategic options. With input from Goldman Sachs, the Board discussed the rationale for considering a possible sale transaction, which included: (i) the opportunity to deliver a near-term premium to stockholders, which would benefit from synergies that could be reflected in an acquisition by a strategic company; (ii) that the attractive financing markets could facilitate an acquisition by either a strategic company or a private equity firm; (iii) the risks associated with executing the business plan on a standalone basis; and (iv) the risk that without a substantial corporate action, the Company’s common stock would continue to trade at a discount compared to peer companies. On the other hand, the Board discussed, with input from Goldman Sachs, other considerations which could make a sale transaction less attractive in the near term, including: (i) the upside potential from executing the business plan on a standalone basis; (ii) that the market had reacted positively to the strategic initiatives that Safeway was undertaking and Safeway had not completed those actions; (iii) that an acquisition would affect Safeway’s ability to spin-off shares of Blackhawk Class B common stock in a tax-free distribution to its stockholders; and (iv) the

 

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benefits from deploying the cash proceeds from the Canadian Sale to repurchase stock and repay debt. Latham & Watkins LLP, Safeway’s outside legal counsel (“Latham”), advised the directors of their fiduciary duties in connection with the various alternatives.

Also at the Board meeting, Safeway’s senior management team presented their initial analysis of the potential synergies that could be realized from a strategic combination with Albertson’s LLC. Goldman Sachs advised the Board as to the amount that they believed a private equity firm was likely to pay to acquire Safeway, which was likely to be less than what Albertson’s LLC or another strategic company would likely pay because of the potential synergies that could be realized by a strategic acquiror. The Board also met with an outside consulting firm and reviewed an analysis prepared by that firm regarding Safeway’s operations and ways to optimize its geographic portfolio and strengthen its core grocery business. Based on the factors considered at the Board meeting and set forth above, the Board concluded that it would not pursue a sale of Safeway at that time, but rather that it would continue to implement its current business plan and implement a strategy to return cash to the stockholders that it expected to receive from the Canadian Sale. The Board believed that these strategic actions would enhance the market value of the Company, and if the Company were to be sold, would lead to a higher sale price. The Board unanimously approved an increase in the authorization under Safeway’s stock repurchase program by $2.0 billion and authorized management to enter into a Rule 10b5-1 plan to repurchase shares of Company common stock commencing after the receipt of the proceeds from the Canadian Sale.

On October 22, 2013, Reuters reported a rumor that a handful of private equity firms, including Cerberus, were exploring a transaction to acquire all or part of Safeway. The next day, the Company’s common stock closed at $35.58, an 8% increase over the previous closing price. Following the publication of the Reuters article, Goldman Sachs was contacted by two private equity firms asking if there might be an opportunity to discuss a potential transaction involving Safeway or its real estate assets. Safeway and Goldman Sachs also met with a real estate firm concerning whether it might have an interest in pursuing a possible transaction involving Safeway or its real estate assets. These contacts did not lead to more detailed discussions, and none of these parties provided an indication of interest.

Also following the publication of the Reuters article, Mr. Miller again contacted Mr. Edwards to express Albertson’s LLC’s continued interest in acquiring Safeway. After consulting with the Board Chairman, on November 1, 2013, Mr. Edwards, two other Safeway executives and Goldman Sachs met with Mr. Tessler, Mr. Miller and other executives of Cerberus and Albertson’s LLC. At that meeting, Cerberus and Albertson’s LLC expressed their continued interest in acquiring Safeway. The discussions remained at a high level and included a discussion of possible synergies that could be realized from a combination of the companies based on Cerberus’ and Albertson’s LLC’s review of publicly available information concerning Safeway, a high level estimate of the value of Safeway’s real estate assets (which Safeway’s management estimated to be approximately $11 billion as of November 1, 2013), and business opportunities arising from a potential combination of the two companies. This high level estimate of real estate value was prepared using information and estimates developed by Safeway management, including estimated values of leasehold interests based on internal estimates of market rental rates. The estimate was based on numerous estimates and assumptions made by Safeway and reflected subjective judgment in many respects. The estimates constitute forward-looking information and are subject to risks and uncertainties that could cause the actual value of the real estate to differ materially. The estimate did not include information derived from third party appraisals and did not take into account indebtedness relating to such real estate or otherwise. As discussions between Albertson’s LLC and Safeway progressed, Albertson’s LLC developed its own estimates of real estate value (including by using third party appraisers who valued Safeway’s owned and ground leased real estate at $6.5 billion) and did not rely on this high level estimate. Mr. Edwards stated that the Board had not decided to pursue a potential sale or other transaction, and that Safeway’s purpose in meeting with Albertson’s LLC and Cerberus was to determine whether it was desirable to engage in discussions with Albertson’s LLC and Cerberus to pursue a potential transaction. At that meeting, Mr. Tessler stated that Cerberus contemplated that, if a transaction were to be completed between Albertson’s LLC and Safeway, Mr. Miller would be the Chairman of the combined company and Mr. Edwards would be Chief Executive Officer of the combined company. Mr. Edwards and Goldman Sachs

 

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made it clear that if the parties were to continue to discuss a sale transaction, and assuming Mr. Edwards would have that role, there would be no discussion of Mr. Edwards’ employment terms or compensation.

On November 4, 2013, the Executive Committee met to discuss the possibility of pursuing a potential transaction with Albertson’s LLC and the separate synergy analyses that had been developed by each of Cerberus and Albertson’s LLC, on the one hand, and Safeway’s management, on the other. Mr. Edwards and Goldman Sachs provided a detailed summary of the November 1 meeting, including that Albertson’s LLC and Cerberus stated their view that Mr. Edwards would be Chief Executive Officer of the combined company if a transaction were to occur. The Executive Committee decided that it was appropriate to continue discussions with Cerberus and Albertson’s LLC given the amount of synergies that could potentially be realized, which might enable Albertson’s LLC to pay an attractive price to Safeway’s stockholders. The Executive Committee discussed Albertson’s LLC’s ability to obtain the equity and debt financing that would be needed to finance a transaction. The Executive Committee authorized management to work with Cerberus and Albertson’s LLC to provide a more fully developed analysis of the synergies that could result from a merger of Safeway and Albertson’s LLC and that could form the basis for an initial indication of value from Cerberus and Albertson’s LLC. However, the Executive Committee concluded that it was premature to permit Cerberus and Albertson’s LLC to undertake a due diligence review or engage in detailed discussions regarding a transaction, as they had not put forth an acquisition proposal with a price and other key terms that the Executive Committee believed could form the basis for such review or discussions.

Also on November 4, 2013, Safeway completed the Canadian Sale for gross proceeds of approximately C$5.8 billion.

On November 5, 2013, Safeway entered into a mutual confidentiality agreement with Cerberus and Ultimate Parent. On November 6, 2013, Safeway permitted Cerberus to speak with the other principal investors in Ultimate Parent: Kimco Realty Corporation, Klaff Realty LP, Lubert-Adler Partners LP, and Schottenstein Stores Corporation (collectively, the “Co-Investors”) regarding their possible interest in investing in a potential transaction. Because Cerberus had not provided an indication of what value it would propose for the Parent Entities to pay, Safeway did not permit Cerberus at the time to contact its limited partners or potential lenders regarding a potential transaction. Thereafter, Safeway provided limited, high level information to Cerberus, Albertson’s LLC and the Co-Investors, and representatives of Safeway, Albertson’s LLC and Cerberus worked together to analyze the potential synergies that would result from a merger transaction. Goldman Sachs also had discussions with Cerberus to assess the ability of Cerberus and Albertson’s LLC to finance a transaction.

On November 21, 2013, Mr. Edwards and Goldman Sachs met with Mr. Tessler and Mr. Miller. Mr. Tessler outlined the broad terms of how Cerberus and Albertson’s LLC contemplated financing a possible acquisition. The proposed sources of financing included debt financing, equity contributions from Cerberus and the Co-Investors, the purchase of Safeway’s Eastern division by NAI and the purchase of Safeway’s real-estate development subsidiaries Property Development Centers, LLC and PDC I, Inc., which would own certain shopping centers and related Safeway stores (“PDC”), by Cerberus and certain of the Co-Investors. Mr. Tessler also mentioned that a proposal would contemplate that Safeway would make a separate pro-rata distribution to its stockholders of the shares of Class B common stock of Blackhawk that the Company owned (the “Blackhawk Distribution”). Cerberus and Albertson’s LLC said that they had refined their analysis of potential antitrust issues and that they were continuing to analyze potential synergies. They said that further discussions were needed among Cerberus and the Co-Investors before they would be in a position to provide a preliminary non-binding proposal.

On November 26, 2013, Goldman Sachs met with Mr. Tessler and other representatives of Cerberus. Mr. Tessler and other representatives of Cerberus described the terms of a preliminary non-binding proposal pursuant to which Albertson’s LLC would acquire Safeway for $35.00 per share in cash and assumed Safeway stockholders would separately receive shares of Blackhawk Class B common stock pursuant to the Blackhawk Distribution. Goldman Sachs stated that Safeway would not respond until the Board had reviewed the proposal. Thereafter, Cerberus, Albertson’s LLC and NAI delivered their preliminary non-binding proposal in writing (the

 

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November Proposal”), which reflected the terms that Mr. Tessler and other representatives of Cerberus had outlined orally. The November Proposal noted that Ultimate Parent, as the owner of the combined company, would be responsible for approximately $400 million of corporate-level taxes that would be payable in respect of the Blackhawk Distribution. The November Proposal was subject to an extensive due diligence investigation and a number of assumptions and conditions. Cerberus noted that the Wall Street analyst consensus estimates of the future value of shares of Blackhawk Class B common stock were $27.00 per share and that a Goldman Sachs analyst had estimated the future value of Blackhawk Class B common stock to be $30.00 per share. Based on these estimates, the November Proposal stated that it provided a total implied value to Safeway stockholders of $39.48 to $39.98 per share of Company common stock.

On November 27, 2013, the Executive Committee reviewed the November Proposal. The Executive Committee instructed Goldman Sachs to speak with Cerberus to clarify the terms of the November Proposal and to inform Cerberus that the initial reaction of Board members was that the proposed price was not acceptable and was not a basis for the parties to move forward with a transaction. The Executive Committee noted that the current price for shares of Blackhawk Class A common stock was approximately $22.00 per share, which was substantially less than the targeted prices that Cerberus had used to arrive at its implied value in the November Proposal. This difference, based on the then current price of shares of Blackhawk Class A common stock, would mean that the implied value of the November Proposal was approximately $0.70 to $1.20 per share less than the value ascribed by Cerberus, or $38.76 per share.

Later on November 27, 2013, Goldman Sachs relayed to Mr. Tessler the Executive Committee’s response that the November Proposal was not acceptable and would not constitute a basis for the parties to pursue discussions regarding a possible acquisition. Mr. Tessler stated that Cerberus and Albertson’s LLC were willing to consider new information that could affect their view on price. Mr. Tessler also expressed Cerberus’ view that Safeway may have difficulty achieving its 2014 projections and noted that the November Proposal had taken into account its expectation that stores divested in connection with an antitrust regulatory review would be sold at a discount. On November 29, 2013, Goldman Sachs asked Cerberus questions that Safeway and its advisors had about the November Proposal. Cerberus again expressed willingness to consider additional information that could affect its view on value.

On December 4, 2013, JANA Partners filed a Schedule 13D amendment disclosing that they had reduced their ownership in Safeway to approximately 4%. In conversations with Safeway’s senior management, JANA Partners had indicated that they were supportive of the actions that Safeway had taken to maximize stockholder value.

On December 5, 2013, at a regularly scheduled Board meeting, the full Board reviewed the November Proposal with Goldman Sachs and Latham. Latham advised the directors on their fiduciary duties in connection with their consideration of the November Proposal. The Board, like its Executive Committee, also concluded that the proposed price was insufficient to proceed with a sale transaction and did not change the Board’s view that Safeway was not for sale and could provide greater potential value to its stockholders as an independent company. The Board strategized about how to respond to Cerberus and Albertson’s LLC to determine if they would be willing to propose a higher price. At the meeting, Goldman Sachs reported on the contacts that they had with the private equity firms and the real estate firm. The Board also reviewed a list of strategic companies that could be acquirors of the Company, all of which were quite familiar to the Board. The Board did not believe it was likely that any of these strategic companies were likely to pursue an acquisition of Safeway. The Board based its conclusion on a variety of factors, including that the store formats of some of the companies were significantly different than those of the Company, an acquisition of Safeway by some of the companies would raise significant regulatory concerns and some of the companies were facing their own operational and financial challenges which made it highly unlikely that they would pursue an acquisition of this size. Nevertheless, all of these strategic companies were contacted during, and in some cases prior to, the “go shop” period described below in order to make sure there was a thorough exploration of potential acquirers. At such meeting, and consistent with Goldman Sachs’ prior disclosure in September 2013 to Safeway’s management and the Executive Committee, Goldman Sachs orally informed the Board with respect to certain prior investment banking engagements and relationships that Goldman Sachs had with Ultimate Parent and its affiliates and Cerberus and

 

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its affiliates and portfolio companies. The Board also met with the consulting firm which had been retained earlier to analyze Safeway’s ongoing business and discussed the ongoing strategy to increase stockholder value through optimizing its geographic portfolio through possible acquisitions or sales and through strategic initiatives designed to improve sales, such as new store concepts and marketing initiatives.

On December 6, 2013, Goldman Sachs informed Cerberus that the Board had determined that the November Proposal was not a sufficient basis to move forward on a transaction. Goldman Sachs stated that should Cerberus and Albertson’s LLC want to submit another proposal, there were elements of value they should consider which the Board believed would support a higher price. Goldman Sachs stated that while the Board was willing to consider a transaction that represented full value to the stockholders, the Board did not view Safeway as being for sale and would not be proposing a counteroffer. From December 8 to December 10, 2013, Goldman Sachs had follow up calls with Cerberus and provided additional information that Safeway believed supported a higher price, including high-level projections.

On December 10 and 11, 2013, Goldman Sachs spoke with Cerberus. Cerberus indicated that Cerberus and Albertson’s LLC were preparing a revised non-binding proposal as their “best and final” proposal, which assumed the Blackhawk Distribution would be done in a manner that would secure a tax step-up in the assets of Blackhawk, which Cerberus believed would increase the value of the shares of Blackhawk Class B common stock distributed to Safeway’s stockholders. Safeway’s tax advisors also spoke with Schulte Roth & Zabel LLP, counsel to the Parent Entities (“Schulte Roth”), about the potential step-up.

On December 12, 2013, Cerberus, Albertson’s LLC and NAI delivered a written preliminary non-binding proposal (the “December Proposal”), which provided for a merger in which Safeway’s stockholders would receive $37.50 per share in cash. The December Proposal also assumed that Safeway stockholders would receive shares of Blackhawk Class B common stock in the Blackhawk Distribution on or before April 18, 2014 (the one year anniversary of the Blackhawk IPO) and that Safeway would make an election to obtain a tax step-up in its assets of Blackhawk. Based on the then current market value of shares of Blackhawk Class A common stock, the December Proposal estimated that the total implied value of the Company based on the December Proposal (based on the value of the cash consideration and the Blackhawk Distribution assuming a tax-step (which Albertson’s LLC estimated to be worth $0.51 to $0.61)) would be $41.82 per share of Company common stock (using a 30-day average price of $22.86 per share of Blackhawk Class A common stock) or $42.61 per share of Company common stock (using a Wall Street estimate of $27.00 per share of Blackhawk Class B common stock). In the December Proposal, Cerberus and Albertson’s LLC indicated their confidence that the merger transaction would receive regulatory approval and offered to review their analysis with Safeway’s antitrust counsel. Cerberus and Albertson’s LLC also indicated that they anticipated that they would be in a position to execute definitive documentation for a transaction by late January 2014.

The following is a summary comparison of the economic terms of the November Proposal and the December Proposal that the Board considered:

 

     November Proposal –
Safeway View
     December Proposal –
Safeway View
 

Cash

   $ 35.00       $ 37.50   

Value of shares of Blackhawk Class B common stock(1)

   $ 3.89       $ 3.89   

Value of Blackhawk tax basis step-up

     —         $ 0.51   

Total

   $ 38.89       $ 41.90   

 

(1) Based on the $23.44 per share closing price of Blackhawk Class A common stock on December 12, 2013.

On December 13, 2013, Goldman Sachs, Latham and Safeway’s tax advisors spoke with Cerberus and Schulte Roth to clarify certain terms of the December Proposal relating to Blackhawk. Safeway’s advisors communicated that Safeway expected Albertson’s LLC to use its “best efforts” to obtain antitrust regulatory

 

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clearance and to agree to pay a substantial termination fee if it did not close a transaction because it was not able to obtain regulatory clearance or because it failed to secure the necessary financing. Cerberus was generally in agreement with that structure, but the parties did not discuss a specific contract provision or the amount of the termination fee.

On December 15, 2013, at a special Board meeting, the Board discussed the December Proposal. Goldman Sachs, Latham and Safeway’s tax advisors advised the Board on the terms of the December Proposal. In addition to the economic terms, the Board focused on transaction certainty, including Albertson’s LLC’s ability to finance the transaction and obtain antitrust clearance. The Board concluded that while it was not accepting the December Proposal, it would authorize Safeway and its advisors to provide information to Albertson’s LLC, Cerberus, the Co-Investors and their advisors to enable them to conduct a due diligence investigation as well as to authorize Cerberus and Albertson’s LLC to engage with a limited number of debt financing sources. The Board believed that the terms of the December Proposal could potentially lead to an offer to acquire the Company that the Board would find acceptable. The Board recognized that Albertson’s and Cerberus would need to conduct diligence in order for them to make their best offer, including a plan for financing the transaction and obtaining regulatory approval. On December 15, 2013, Safeway terminated its Rule 10b5-1 repurchase plan. On December 16, 2013, Goldman Sachs informed Cerberus of the Board’s decision. Latham and Schulte Roth discussed the diligence process and establishing “clean room” procedures for sharing highly confidential information. On December 23, 2013, Safeway’s counsel and Albertson’s LLC’s counsel met to discuss Albertson’s LLC’s antitrust analysis of the merger transaction. On December 24, 2013, Safeway provided Cerberus and Albertson’s LLC and their representatives access to a virtual data room.

In early December 2013, Mr. Edwards and Goldman Sachs met with a real estate investment firm which had expressed an interest in engaging in a transaction involving Safeway’s real estate assets. In late December, the real estate firm provided a presentation outlining a potential transaction whereby the real estate firm and Safeway would form a joint venture to hold Safeway’s real estate assets, which would be managed and owned principally by the real estate firm. Safeway determined to continue to pursue a possible sale of the entire company with Albertson’s LLC rather than pursue this potential real estate transaction.

During the last week of December 2013 and the first weeks of January 2014, Cerberus, Albertson’s LLC and the Co-Investors and their financial and legal advisors conducted an extensive due diligence investigation. The parties held a number of diligence meetings in person in New York on or about January 6 and 7, 2014 and in San Francisco on January 8, 9, 15 and 16, 2014 and held many diligence sessions by telephone. On January 7, 2014, at the direction of the Company in consultation with members of the Executive Committee, Latham sent Schulte Roth a draft merger agreement.

During December and January, Mr. Edwards met with certain of the other owners of Casa Ley, during which Mr. Edwards raised the possibility that some or all of the other owners might buy Safeway’s 49% interest in Casa Ley. The other owners did not agree to pursue a potential acquisition of Safeway’s interest in Casa Ley at that time.

On January 14, 2014, the Executive Committee met to discuss the status of the due diligence investigation and expected next steps. Certain members of Safeway’s management and Goldman Sachs reported that there were positive and negative factors that had come out of the diligence review over the past weeks, possibly with the balance leaning toward the negative, including that Safeway’s identical store sales for the fourth quarter were lower than expected and the amount of the Company’s corporate tax liability associated with the Blackhawk Distribution had increased due to an increase in the price of Blackhawk Class B common stock. Latham summarized certain key terms of the draft merger agreement that had been provided to Schulte Roth which were likely to be negotiated. The Executive Committee also discussed the process to proceed with the Blackhawk Distribution.

On January 16, 2014, during one of the diligence meetings, Mr. Miller met with Mr. Edwards and expressed concerns that Albertson’s LLC may not be in a position to execute a definitive merger agreement as quickly as expected, in part because of concerns related to the completion of negotiations for the financing, as well as the

 

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need for further analysis of potential store divestitures in light of the substantial termination fee that Albertson’s LLC believed Safeway would require Albertson’s LLC to agree to pay should the transaction not close because of the failure to obtain financing or antitrust clearance. Mr. Miller also expressed the need for Cerberus and Albertson’s LLC to receive additional diligence materials.

On January 23, 2014, Safeway, Goldman Sachs, Cerberus and Albertson’s LLC met to discuss the proposed transaction. Cerberus stated that risks associated with the proposed transaction as outlined in the December Proposal were too great and Cerberus and Albertson’s LLC were not willing to proceed on the terms outlined in the December Proposal. Among the identified risks were that the cost of the financing would be greater than expected in light of the financing sources’ requirement that the debt financing be funded a substantial period of time before the expected closing of the transaction. Also, Cerberus and the Co-Investors indicated they now believed that the value of PDC was less than they had estimated previously. In this meeting, Cerberus orally proposed a different transaction (the “Recap Proposal”) whereby Safeway would remain a public company and would undertake a leveraged recapitalization that would permit it to pay a large dividend to Safeway’s stockholders. The Recap Proposal contemplated that Safeway would acquire Albertson’s LLC in exchange for new equity that would result in Cerberus and the Co-Investors owning approximately one-half of Safeway. The Recap Proposal also contemplated that Cerberus and the Co-Investors would have the opportunity to purchase additional shares of Safeway, which would result in them owning a controlling interest in Safeway. On January 24, 2014, counsel for Cerberus and Albertson’s LLC presented their antitrust analysis of a combination of Safeway and Albertson’s LLC to antitrust counsel for Safeway.

On January 25, 2014, based on feedback from members of the Executive Committee, Goldman Sachs notified Cerberus that Safeway would not pursue the Recap Proposal. Cerberus responded that it would still like to pursue a merger transaction between Albertson’s LLC and Safeway. On January 29, 2014, Cerberus told Goldman Sachs that Cerberus and Albertson’s LLC were preparing a revised proposal that would take into account their concerns about the cost of the debt financing, the value of PDC and the risk of lost value as a result of store divestitures to obtain regulatory approval.

On January 30, 2014, Safeway began discussions with Eastdil Secured, LLC, a nationally recognized advisory firm specializing in real estate transactions (“Eastdil Secured”), regarding the value of PDC and the possible steps that Safeway might take if it decided to pursue the sale of PDC. On or about this time, management and Safeway’s advisors began to analyze and prepare for the Blackhawk Distribution, independent of the strategic discussions relating to Safeway as a whole.

On January 31, 2014, Cerberus, Albertson’s LLC and NAI submitted a written revised non-binding proposal (the “January Proposal”) to acquire all of Safeway’s outstanding shares for $32.00 cash per share, with Safeway’s stockholders receiving as additional consideration the net proceeds from the sales of Safeway’s 49% interest in Casa Ley, S.A. de C.V. (“Casa Ley”) and its 100% interest in PDC. The January Proposal continued to assume that Safeway would make the Blackhawk Distribution prior to the one year anniversary of the IPO, which would allow Safeway stockholders to separately realize the value of the shares of Blackhawk Class B common stock and the tax step-up. The January Proposal valued the shares of Blackhawk Class B common stock and related step-up at $4.75 to $5.25 per share of Company common stock. The January Proposal provided that Safeway stockholders would receive their pro-rata portion of the net proceeds from the sales of Casa Ley and PDC, and stated that if Casa Ley and/or PDC were not sold prior to the closing of the Merger, Safeway stockholders would receive contingent value rights (“CVRs”) entitling them to receive their pro-rata portion of the net sale proceeds with respect to a sale after the closing of the transaction. The January Proposal estimated the total value of the Casa Ley and PDC sales proceeds to be approximately $3.50 to $3.75 per share and estimated the total implied value to Safeway stockholders at $40.25 to $41.00 per share.

Following discussions and input by members of the Executive Committee, on February 3, 2014, Goldman Sachs and Safeway met with Cerberus and Albertson’s LLC to discuss the January Proposal. Safeway indicated that it was not willing to move forward under the terms of the January Proposal. Goldman Sachs’ analysis

 

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showed that the January Proposal represented a decrease in overall value from the December Proposal of approximately $1.85 per share. In addition, Safeway believed that the values ascribed by the January Proposal to PDC and Safeway’s interest in Casa Ley were overstated. Safeway noted that if PDC were sold, Safeway and the new owner of PDC would enter into long-term leases pursuant to which Safeway would lease the stores that were owned by PDC. Safeway stated that in order for its stockholders to realize full value for PDC, the aggregate rents on the Safeway stores owned by PDC would need to be higher than contemplated by the January Proposal.

The January Proposal also contemplated that the transaction would be subject to a closing condition requiring that antitrust clearance be granted on terms consistent with the conditions in the debt financing. Goldman Sachs told Cerberus that such a proposed closing condition was unacceptable. Goldman Sachs also told Cerberus that the Board expected that the Parent Entities, Cerberus and the Co-Investors would pay a substantial cash termination fee if they were unable to complete the transaction due to the failure to obtain antitrust clearance or if they were unable to obtain the financing to complete the transaction.

On February 6, 2014, Cerberus, Albertson’s LLC and NAI submitted a written revised non-binding proposal (the “February 6 Proposal”) which increased the cash price to $32.25 per share of Company common stock and contemplated the Blackhawk Distribution and the payment to Safeway stockholders of the net sales proceeds of Casa Ley and PDC in the same manner as the January Proposal. The February 6 Proposal contemplated that PDC would be sold having fee ownership of 12 completed stores, leased to Safeway at aggregate annual rents of $10 million (which was a rental rate substantially lower than Safeway believed acceptable). The February 6 Proposal also contemplated that PDC’s expected value would be enhanced by the completion of various PDC projects under construction utilizing the proceeds of a debt financing to be provided by Safeway (as originally suggested in the January Proposal). In addition to the $0.25 increase in the cash price compared to the January Proposal, the February 6 Proposal also reflected an estimated increase of $0.50 per share in value over the January Proposal based on the expected value upon completion of PDC assets under construction. With this $0.75 per share increase, the February 6 Proposal estimated its per-share value at $41.00 to $41.75 per share. The February 6 Proposal included a detailed proposal concerning contractual provisions relating to regulatory matters. The February 6 Proposal also contemplated that instead of paying a cash termination fee if the Parent Entities were unable to obtain regulatory clearance, Ultimate Parent would purchase Safeway’s Eastern division for $650 million and, if Albertson’s LLC failed to close for any other reason, Ultimate Parent would agree to a termination fee of $250 million (or a termination fee of $500 million if the termination resulted from a Parent Entity’s willful breach of the merger agreement).

On February 7, 2014, the San Francisco Business Times reported that Safeway was the subject of persistent speculation that it would be acquired or taken private.

On February 12, 2014, the Executive Committee met to discuss the February 6 Proposal. Goldman Sachs and Latham updated the Executive Committee on the terms of the February 6 Proposal. Safeway’s management estimated that the total value of the proceeds from the sales of the Company’s interest in Casa Ley and PDC was approximately $0.10 to $0.50 less than what Cerberus estimated. Although the Executive Committee believed that there should still be more negotiation on price, the Executive Committee concluded that the total implied value of the February 6 Proposal was in a range that the Board would find to be in the best interests of Safeway and its stockholders and therefore supported moving forward with the negotiation of an agreement. The Executive Committee noted that the expected year-end and fourth quarter results showed an increase in same store sales compared to the prior year and that recent merchandising initiatives had produced positive results. Nonetheless, the Executive Committee was concerned that there were substantial risks associated with Safeway executing its business plan on a standalone basis, especially from increased competition in certain geographic regions where Safeway did not enjoy broad customer acceptance. The Executive Committee also noted that given the Canadian Sale and the disposition of four Dominick’s Finer Foods stores in Chicago, and soon Blackhawk, the value of Company common stock would depend solely on the performance of core U.S. grocery business and based on historical and expected results would likely continue to trade at a discount compared to peer companies.

The Executive Committee particularly focused on transaction certainty and the need for the Parent Entities to take all actions to avoid or eliminate every impediment under any antitrust law in order to enable the closing to

 

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occur as soon as possible. The Executive Committee was also concerned about Safeway’s ability to sell its interest in Casa Ley given Safeway’s minority ownership interest in that company. The Executive Committee instructed Goldman Sachs and Latham to inform Cerberus as follows: Safeway was not willing to move forward under the terms of the February 6 Proposal; Safeway would not complete a transaction unless the Parent Entities, Cerberus and the Co-Investors were obligated to pay a meaningful cash termination fee if the transaction failed to obtain antitrust clearance, and Safeway would accept a termination fee of $500 million; Safeway was seeking a higher cash price; and Safeway was requiring Albertson’s LLC to purchase the Company’s interest in Casa Ley and therefore to increase the cash merger consideration in lieu of a CVR.

The Executive Committee also asked Goldman Sachs to contact private equity firms to see if they might be interested in making a proposal that would be competitive with the February 6 Proposal. The Executive Committee noted that while a private equity firm would not have the same antitrust impediments as Albertson’s LLC, it also would not have the same synergies which likely would limit the price it would be willing to pay. Mr. Edwards discussed with the Executive Committee that as part of the upcoming earnings release on February 19, Safeway was planning to announce that it was in discussions regarding a possible sale transaction. Safeway’s management believed that this announcement was necessary in order to explain to stockholders why Safeway had not used the proceeds from the Canadian Sale to make all of the stock repurchases and debt repayments Safeway had previously announced.

Also at its February 12, 2014 meeting, the Executive Committee determined that a distribution of the shares of Blackhawk Class B common stock was, for separate business reasons, in the best interest of Safeway and Blackhawk, and their respective stockholders, and decided that Safeway would proceed with the Blackhawk Distribution regardless of whether or not Safeway entered into a transaction with Albertson’s LLC or another acquiror.

The following is a summary comparison of the economic terms of the January Proposal and the February 6 Proposal as estimated by Cerberus, Albertson’s LLC and NAI, and Safeway’s view of the value of the February 6 Proposal:

 

    January Proposal –
Albertson’s LLC
Estimated Value
    February 6 Proposal –
Albertson’s LLC
Estimated Value
    February 6 Proposal –
Safeway View
 

Cash

  $ 32.00      $ 32.25      $ 32.25   

Value of Casa Ley and PDC(1)

  $ 3.50 to 3.75      $ 4.00 to 4.25      $ 3.56 to 3.96   

Total Cash Consideration

  $ 35.50 to 35.75      $ 36.25 to 36.50      $ 35.81 to 36.21   

Value of shares of Blackhawk Class B common stock to Safeway stockholders(2)

  $ 4.25 to 4.50      $ 4.25 to 4.50      $ 4.30   

Value received by stockholders

  $ 39.75 to 40.25      $ 40.50 to 41.00      $ 40.11 to 40.51   

Value of Blackhawk tax basis step-up to Safeway stockholders

  $ 0.50 to 0.75      $ 0.50 to 0.75      $ 0.77   

Total

  $  40.25 to 41.00      $  41.00 to 41.75      $  40.88 to 41.28   

 

(1) Safeway’s view of the value of Casa Ley assumed the sale of the entirety of Casa Ley and that Safeway would receive its pro rata share relative to its 49% interest.
(2) Safeway value based on the $26.72 per share closing price of Blackhawk Class A common stock on February 11, 2014.

Later that day, Goldman Sachs and Latham communicated to Cerberus and Schulte Roth the Executive Committee’s response to the February 6 Proposal.

On February 13, 2014, Cerberus informed Goldman Sachs that Cerberus and Albertson’s LLC would present a revised proposal and that they had negotiated improved terms with the lending group, including extending the financing commitment to 15 months, provided that certain debt financing would be required to be funded into escrow at 12 months.

 

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On February 14, 2014, Cerberus orally described to Goldman Sachs a revised proposal (the “February 14 Proposal”). Cerberus said that it would be willing to proceed on the same economic terms as the February 6 Proposal (i.e. a cash payment of $32.25 per share and the net proceeds from the sales of the Company’s interest in Casa Ley and PDC) or, if Safeway preferred, Cerberus would be willing to increase the cash payment to $32.50 per share and stockholders would receive the net proceeds only from the sale of PDC (and would not receive the proceeds from the Company’s interest in Casa Ley, which would be retained by Safeway). The February 14 Proposal also included an additional daily fee (or ticking fee) for each day that the closing did not occur after the one year anniversary of the signing of a merger agreement. Cerberus stated that Albertson’s LLC would agree to pay the higher aggregate annual rent payments of $16 million that Safeway had requested for the PDC stores, and also would agree that the Parent Entities, Cerberus and the Co-Investors would agree to a cash termination fee of $400 million if the transaction did not close due to the failure to obtain antitrust clearance or financing (among other reasons). Goldman Sachs responded that they did not believe that the Board would view the price as sufficient, and stated that the alternative choice undervalued Casa Ley. Latham and Schulte Roth also discussed the terms of the February 14 Proposal.

On February 15, 2014, based on feedback from members of the Executive Committee, Goldman Sachs informed Cerberus that the February 14 Proposal was not sufficient on price and that the termination fee should be higher. Goldman Sachs and Cerberus had numerous discussions throughout the day, after which Cerberus stated that Cerberus and Albertson’s LLC would raise the cash portion of the most recent proposal to $32.50 and stockholders would receive the net proceeds from the sale of both Casa Ley and PDC (the “February 15 Proposal”). That afternoon, Safeway’s management informed the Executive Committee by email of the terms of the revised proposal and asked for the approval of the Executive Committee to continue to proceed with Albertson’s LLC and Cerberus and their advisors to work on definitive documents. The Executive Committee members responded that they supported moving forward with the negotiation of definitive agreements based on these terms, making it clear that they were not approving the terms or accepting the revised proposal.

On February 17, 2014, Schulte Roth sent Latham a revised draft of the merger agreement that had been provided in January. The January draft prepared by Latham had included a go-shop period which would permit Safeway to solicit competing acquisition proposals for a period of time following the execution of the merger agreement and further continue discussions for a period of time thereafter with certain qualifying parties who submitted proposals during the go-shop period. During the go-shop period, as extended for qualifying parties, a reduced termination fee would be payable by Safeway in the event it terminated the merger agreement to accept an alternative superior proposal. Among other changes, the revised draft from Schulte Roth deleted the go-shop provisions.

On February 19, 2014, Goldman Sachs contacted one of the private equity firms that had made an inquiry following the October 22 publication by Reuters that Safeway may be the subject of an acquisition. Goldman Sachs asked whether that firm would have a potential interest in acquiring Safeway.

On February 19, 2014, Safeway announced its earnings for the fourth quarter of 2013. Safeway also announced that (i) it was in discussions concerning a possible sale of Safeway, (ii) it planned to seek to monetize some or all of its investment in Casa Ley and (iii) it had decided to proceed with the Blackhawk Distribution. Safeway further stated its conclusion that distributing the shares of Blackhawk Class B common stock to its stockholders would provide them with additional liquidity and provide full independence for Blackhawk and would be an important step toward maximizing the value of Safeway’s long-term investment in Blackhawk.

On February 20, 2014, the private equity firm orally notified Goldman Sachs that it did not have an interest in pursuing a transaction involving Safeway. Also on February 20, 2014, a senior executive of a large retail grocery chain (“Company A”) contacted Goldman Sachs to inquire about Safeway’s interest in discussing a potential sale of all or a portion of Safeway and requested a meeting with Safeway’s management.

Over the next few days, Goldman Sachs was contacted by the founder of a retail company based outside the United States and three private equity firms that inquired about participating in a possible transaction involving Safeway, and one private equity firm that inquired about a possible acquisition of Blackhawk. After this initial

 

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contact, none of these parties expressed an interest in having further discussions with Safeway concerning a potential transaction. Goldman Sachs also contacted two other private equity firms, each of which had been rumored to be interested in purchasing Safeway, and determined that they had no such interest. Goldman Sachs also contacted another retail company based outside the United States, which also said that it was not interested in pursuing an acquisition of Safeway.

On February 22, 2014, Latham and Schulte Roth discussed the draft merger agreement and the terms of the equity and debt financing commitments for the proposed transaction. Schulte Roth reiterated that Cerberus and Albertson’s LLC did not agree to a go-shop period.

On February 24, 2014, Goldman Sachs spoke with a senior officer of Company A. Goldman Sachs asked Company A to indicate what value it would consider paying and how it would propose to obtain antitrust clearance and address the risk that it might not be able to obtain such clearance. Company A requested information about Safeway and stated that it would need to meet with Safeway’s management in advance of providing an indication on value.

On February 25, 2014, the Board held a special meeting and discussed the proposed transaction with Albertson’s LLC and the interest expressed by Company A.

At the Board meeting, Goldman Sachs updated the Board on its discussions with Company A regarding Company A’s possible interest in acquiring Safeway. Safeway’s antitrust counsel advised the Board on the possible antitrust issues raised by a potential sale transaction with Company A. The Board expressed concern over whether Company A would be serious about pursuing a transaction, the competitive harm that could occur if Safeway’s confidential information were misused and whether a transaction with Company A could obtain antitrust clearance. Goldman Sachs also discussed other parties who might be interested in acquiring Safeway and the feedback that Goldman Sachs had received from certain of these parties. Goldman Sachs reported that to date no party other than Albertson’s LLC and Company A had expressed a serious interest in pursuing a transaction. The Board instructed Goldman Sachs and Latham to continue to respond to inquiries from, and actively engage with, Company A and to continue to contact other parties, and actively engage with other parties who approach Safeway, about a possible sale transaction in order to seek to maximize value for stockholders. At the same time, Board members stated that Safeway should continue to work with Albertson’s LLC to facilitate its developing a definitive proposal given how far advanced they were in terms of diligence and the negotiation of a definitive agreement.

Mr. Rogers reminded the Board during the February 25, 2014 meeting that Albertson’s LLC and Cerberus continued to express their intention that Mr. Edwards would be the CEO of the combined company. As a result, the Board considered whether to create a special committee to evaluate the proposed transaction with Albertson’s LLC and Cerberus. The Board determined that a special committee was not necessary because (i) of the nine directors, Mr. Edwards was the only director who was an employee of Safeway and Mr. Edwards was the only director who might have a position with Albertson’s LLC following the closing, (ii) none of the other directors had any conflict with respect to Cerberus, Albertson’s LLC, or the Merger, (iii) the interests of all of the other directors were aligned with those of the stockholders, and (iv) the oversight of the process by the other directors would prevent any adverse effect on the process.

Also at the Board meeting, Goldman Sachs updated the Board on negotiations with Cerberus and Albertson’s LLC and reviewed in detail the terms of the most recent proposals received from them. Latham described the key terms of the draft merger agreement, including the antitrust and financing covenants and the termination fee, and advised the directors regarding their fiduciary duties in connection with the directors’ consideration of the proposals. Latham noted that Cerberus and Albertson’s LLC had rejected the go-shop provision in the most recent draft of the merger agreement. The Board instructed the legal and financial advisors to continue to try to obtain a go-shop provision so that if the parties were to sign a merger agreement, there would be another meaningful market check and opportunity to obtain a higher price from a third party. The

 

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Board recognized that there had been market rumors about an acquisition by Cerberus as early as October 2013 and since that time Safeway had been in contact with a number of parties about a possible transaction, that the market rumors about a sale had persisted and that Safeway had announced on February 19 that it was in discussions concerning a possible sale of Safeway. However, given the likelihood that Company A, and possibly other parties, would need more time to determine whether to make a proposal following the February 19 announcement, the Board concluded that a go-shop period would be an effective way to maximize the opportunity for Safeway stockholders to receive the best reasonably available price.

Latham described the CVRs related to the potential sales of Casa Ley and PDC, each of which included a sale deadline of one year after which the stockholders would no longer be entitled to the net proceeds from the sales of the assets. The Board instructed Goldman Sachs and Latham to try to negotiate longer sale deadlines on the CVRs and a minimum payment to stockholders under the Casa Ley CVR in the event that Casa Ley were not sold by the end of the CVR term. The Board noted the previously disclosed prior investment banking work Goldman Sachs had performed for Cerberus and that it is helpful in transactions of the size and type being considered to obtain the views of more than one investment bank. The Board unanimously authorized Safeway’s management to retain a second financial advisor, subject to Board approval, to advise the Board in connection with the proposed transaction.

The following is a summary of the economic terms of the February 15 Proposal that the Board considered on February 25, which compares the value that Albertson’s LLC estimated against the value that Safeway estimated:

 

     February 15
Proposal (As
estimated by
Albertson’s LLC)
     February 15
Proposal (As
estimated by
Safeway)
 

Cash

   $ 32.50       $ 32.50   

Value of Casa Ley and PDC(1)

   $ 4.00 to 4.25       $ 3.56 to 3.87   

Total Cash Consideration

   $ 36.50 to 36.75       $ 36.06 to 36.37   

Value of shares of Blackhawk Class B common stock to Safeway stockholders(2)

   $ 4.25 to 4.50       $ 3.83   

Value received by Safeway stockholders

   $ 40.75 to 41.25       $ 39.89 to 40.20   

Value of Blackhawk tax basis step-up to Safeway stockholders

   $ 0.50 to 0.75       $ 0.70   

Total

   $  41.25 to 42.00       $  40.58 to 40.90   

 

(1) Safeway’s view of the value of Casa Ley assumed the sale of the entirety of Casa Ley and that Safeway would receive its pro rata share relative to its 49% interest.
(2) Safeway value based on $23.77 per share closing price of Blackhawk Class A common stock on February 24, 2014.

The Board considered a number of factors in considering the likelihood that the stockholders would ultimately receive cash payments in respect of the CVRs, including in the case of the PDC CVR, the value of the PDC assets, the real estate markets generally and the likelihood that PDC could be sold prior to the expiration of the term of the PDC CVR (two years following the closing of the Merger), as well as Eastdil Secured’s advice related to the foregoing, and including, in the case of the Casa Ley CVR, Casa Ley’s historical financial information, the Company’s longstanding ownership position in Casa Ley and advice from Goldman Sachs regarding general merger and acquisition activity for retail companies in Mexico. The Board reviewed the terms of the CVRs for both PDC and Casa Ley and noted that the Shareholder Representative would consist of or be controlled by directors who served on the Board prior to the Merger, and would be responsible for conducting and consummating the sale process and would have certain consent rights relating to the control of Casa Ley and the PDC assets. The Board also noted that the Casa Ley CVR included a four-year term and required that Safeway’s stockholders be paid the fair market value of Casa Ley (net of certain costs, fees, expenses and other amounts) if a sale is not completed within the four-year term. Although the Board recognized that the CVRs may yield little or no value to the Casa Ley CVR Holders and the PDC CVR Holders and the illiquidity of the CVRs,

 

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on balance, the Board believed that the stockholders were likely to receive value for the CVRs within the estimated range. However, there can be no assurance that any amounts will actually be paid to holders of the CVRs, or the timing of any payment of any such amounts, and stockholders should approve the Merger only if they are willing to assume the risk that there may be no cash consideration ultimately paid in excess of $32.50 per share of Company common stock.

On February 26, 2014, Safeway, Latham, Cerberus, Albertson’s LLC and Schulte Roth discussed the terms of the PDC sale. Schulte Roth informed Latham that Cerberus and Albertson’s LLC were concerned about the PDC transaction terms and wanted to ensure that the proper assets were included in PDC. The parties had extensive negotiations concerning the amount of capital investment that Safeway would be permitted to make in PDC, the terms of the repayment of that capital, and the ongoing obligations of Safeway following the sale of PDC to a third party. Latham sent Schulte Roth a revised draft of the merger agreement.

On February 26, 2014, Goldman Sachs spoke with Company A to arrange an in-person diligence meeting with members of Safeway’s senior management team and asked Company A to articulate its plan to address possible antitrust issues.

Also on February 26, 2014, Safeway management began discussions with Greenhill, which had been recommended by one of the independent directors, regarding the possibility of Safeway retaining Greenhill to advise the Board as to the financial fairness of the transaction. On February 27, 2014, the Executive Committee authorized retaining Greenhill. On March 3, 2014, pursuant to the Board’s authorization, and based on its qualifications, expertise, reputation and experience in mergers and acquisitions and financings, Safeway retained Greenhill.

On February 27, 2014, Schulte Roth sent Latham a revised merger agreement. The revised agreement included a 21-day go-shop period and an additional 15-day period to continue discussions with qualifying excluded parties who made alternative acquisition proposals during the initial go-shop period. The revised merger agreement also provided for a reduced termination fee during the go-shop period and during the subsequent 15-day period for any excluded parties, in the event terminated in order for the Company to accept an alternative superior proposal.

On February 28, 2014, Safeway and Company A entered into a mutual confidentiality agreement. Certain members of Company A’s management and Company A’s financial advisor met with senior members of Safeway’s management and Goldman Sachs in San Francisco to exchange high level diligence information. Goldman Sachs again pressed Company A for its plan to address antitrust issues.

During the period from February 28 through March 5, 2014, Latham and Schulte Roth negotiated a number of terms of the merger agreement, the CVR agreements and the debt and equity financing commitments. Albertson’s LLC agreed that Safeway would be permitted to pay quarterly dividends between signing and closing of $0.20 per share for the first quarter of 2014 and then $0.23 per share for each of the four quarters thereafter during the term of the merger agreement. The parties also agreed on the length of the initial go-shop period of 21 days, with a 15-day extension for any excluded party making a proposal that the Board determines in good faith after consultation with its financial advisors and outside legal counsel constitutes or could reasonably be expected to lead to a superior proposal during the initial go-shop period. Albertson’s LLC proposed that Safeway would be required to pay a fee of $350 million if Safeway accepts an alternative superior proposal. Goldman Sachs and Latham negotiated a reduction of the Company’s termination fee to $250 million. The parties also negotiated that Safeway would pay a termination fee of $150 million if the merger agreement were terminated during the initial go-shop period or during the 15-day extension with respect to any qualifying excluded party under the merger agreement if Safeway accepted an alternative superior proposal. The parties negotiated a number of issues related to Casa Ley and PDC and the related CVRs, including that the sale deadline under the PDC CVR would be extended to two years, the sale deadline under the Casa Ley CVR would be extended to four years, and that there would be a payment based on the fair market value of any portion of the Casa Ley Interest

 

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that was not sold prior to the sale deadline. The parties also discussed whether a $40 million mortgage that was secured by one of the PDC properties and guaranteed by Safeway would be deducted from any proceeds from the sale of PDC that would be payable to the Safeway stockholders.

On March 2, 2014, consistent with Goldman Sachs’ previous oral disclosure to the Board, the Executive Committee and Safeway’s management, Goldman Sachs provided a written list of certain prior investment banking engagements and relationships that Goldman Sachs had with Ultimate Parent and its affiliates and Cerberus and its affiliates and portfolio companies.

On March 3, 2014, Safeway’s Compensation Committee met and adopted a retention plan for Safeway employees (subject to entry into a definitive acquisition agreement), made annual equity incentive grants and approved the treatment of Company Options and other equity incentive grants in connection with the Albertson’s LLC transaction and the Blackhawk Distribution.

On March 5, 2014, Company A submitted a preliminary non-binding letter indicating its interest in pursuing an acquisition of Safeway for $38.50 to $42.00 per share. Although the letter stated that this price was for “cash” it included an assumed value of $4.70 per share for the Blackhawk Distribution. The letter also assumed a value of $3.95 per share for Casa Ley and PDC, which Company A indicated it had assumed based on guidance from the Company. In its letter, Company A indicated that it would take all of the antitrust risk and agree to a “hell or high water” provision in the merger agreement. Company A stated that it had developed a plan to obtain regulatory clearance, and that it expected to complete conversations with potential divestiture partners within two weeks. Company A’s letter stated that it was highly confident in its ability to finance the transaction and that the transaction was subject to satisfactory completion of customary due diligence, which Company A expected to complete within approximately three weeks following receipt of due diligence materials.

On March 5, 2014, the Board held a special meeting to discuss the proposed transaction with Albertson’s LLC (and the other Parent Entities) and the interest expressed by Company A. Goldman Sachs updated the Board on discussions with Company A and summarized Company A’s preliminary non-binding indication of interest. The Board noted that the letter did not provide a specific plan for addressing the antitrust issues, which appeared more significant than those facing Albertson’s LLC, was not specific on a number of economic terms and was subject to due diligence and other conditions. The Board concluded that if Safeway were to sign a merger agreement with the Parent Entities, it was likely that Company A would continue to pursue its interest during the go-shop period and that the fee payable by Safeway to Albertson’s LLC under the merger agreement would likely not be an impediment to Company A if it wanted to make a competing offer to acquire Safeway. The Board therefore determined to proceed with the Albertson’s LLC transaction.

Goldman Sachs updated the Board on the contacts that had been made with other parties concerning a possible transaction involving Safeway. Goldman Sachs also confirmed that the private equity firms that it had been in contact with and the non-U.S. retailers had indicated that they did not have an interest in pursuing a transaction.

Goldman Sachs and Latham updated the Board on the negotiations that had occurred with Albertson’s LLC, Cerberus and Schulte Roth. Goldman Sachs and Greenhill made presentations regarding their financial analyses of the transaction. Latham made a presentation to the Board concerning the material terms and conditions of the merger agreement that were being negotiated with the Parent Entities and Schulte Roth. Latham also made a presentation to the directors regarding their fiduciary duties. Goldman Sachs reported that earlier that day Cerberus and Albertson’s LLC had agreed that a $40 million mortgage that was secured by one of the PDC properties would not result in a reduction of the net proceeds from the sale of PDC that would be paid to the stockholders. As the definitive documents were still being negotiated, the Board was not asked to approve a transaction at the meeting.

Following the Board meeting, the Board Chairman called Company A’s Chairman and Chief Executive Officer to encourage Company A to continue its efforts to diligence Safeway and to submit a more definitive proposal.

 

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Throughout the evening of March 5 and the day of March 6, 2014, Latham and Schulte Roth worked to finalize the merger agreement, the disclosure schedules, the CVR agreements, the equity and debt financing commitments and other documentation.

On March 6, 2014, the Board held a special meeting after the close of the trading market. The Board again discussed the status of the preliminary non-binding indication of interest submitted by Company A. The Board concluded that Company A was not likely to be in a position to submit a more complete proposal for a number of weeks and, considering the uncertainty surrounding a proposal from Company A, determined to proceed with the Albertson’s LLC transaction. Goldman Sachs and Latham updated the Board on the final negotiations that had occurred with Cerberus, Albertson’s LLC and Schulte Roth and that the terms of the merger agreement and all related documents had been finalized. Goldman Sachs then delivered its oral opinion to the Board, which opinion was confirmed in writing, to the effect that, as of March 6, 2014, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to the holders of shares of Company common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders. Greenhill then delivered its oral opinion to the Board, which opinion was confirmed in writing, to the effect that, as of March 6, 2014, and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the sum of (i) the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be received by the holders of shares of Company common stock pursuant to the Merger Agreement and (ii) the separate per share distribution to the holders of shares of Company common stock in the Blackhawk Distribution was fair, from a financial point of view, to such holders. The Board then approved and adopted the Merger Agreement and, subject to the terms of the Merger Agreement, recommended approval and adoption of the Merger Agreement by the Company’s stockholders and authorized the officers of Safeway to sign the Merger Agreement.

Shortly thereafter, the parties executed the Merger Agreement, and Safeway and Albertson’s LLC jointly announced that they had entered into the Merger Agreement, and that the terms of the Merger Agreement did not alter Safeway’s previously announced plan to consummate the Blackhawk Distribution in mid-April, independent of consummation of the Merger. Safeway also confirmed that its decision to distribute its remaining shares of Blackhawk Class B common stock was not dependent upon the completion of the Merger, and was being undertaken for independent business reasons.

Following execution of the Merger Agreement, during the go-shop period, Company A and its legal and financial advisors engaged in an extensive due diligence review of Safeway. Company A and its legal and financial advisors had access to more than 27,000 documents in a virtual data room and participated in more than 15 diligence calls with Safeway’s management. Safeway and Company A established “clean room” procedures for sharing highly confidential information. In its March 5, 2014 preliminary non-binding indication of interest, Company A had indicated that in order to finalize its plan to satisfy the antitrust regulators, it would need to meet with potential co-investors who could purchase stores that Company A would need to divest in order to obtain antitrust clearance. To facilitate and encourage these meetings, Safeway permitted Company A to contact 26 potential co-investors, seven of which entered into confidentiality agreements with Safeway and Company A in order to permit them to receive diligence materials to evaluate whether they would be interested in purchasing stores that Company A would be required to divest. The potential co-investors included strategic companies and private equity firms.

On March 21, 2014, a senior executive at Company A informed Goldman Sachs that Company A would not be submitting a bid. The senior executive stated that given the costs associated with making the anticipated divestitures to obtain antitrust clearance, Company A’s board of directors had concluded that it was not prepared to offer a price that would constitute a superior proposal to the Albertson’s LLC transaction because it would not realize a sufficient return on its investment. Company A’s senior executive also informed Goldman Sachs that at the right time Company A would like to talk to Albertson’s LLC about the possibility of Company A acquiring stores divested in connection with the antitrust regulatory review.

 

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During the go-shop period, Goldman Sachs contacted a total of 58 potential buyers, including 23 private equity firms and 35 strategic companies (including Company A), to determine whether they might have an interest in making a proposal to acquire Safeway. Also during the go-shop period, all of the private equity firms and strategic companies that had been in contact with Safeway or Goldman Sachs during the previous months were contacted by Goldman Sachs, by Company A as a potential divestiture partner, or both. None of these parties, other than Company A and the seven potential divestiture partners, entered into confidentiality agreements, and none expressed any interest in pursuing a transaction.

On March 28, 2014, Safeway announced that none of the parties contacted by Safeway during the go-shop period notified Safeway by the deadline that they would be interested in pursuing an alternative transaction under the Merger Agreement.

On April 7, 2014, Safeway announced that it had amended the Merger Agreement (“Amendment No. 1”) to provide for, among other things, adjustments to the Company Options, Restricted Stock Units and Performance Share Awards based upon the volume weighted average trading price of the shares of Blackhawk Class B common stock pursuant to the Blackhawk Distribution, rather than based upon the closing price of the capital stock of Blackhawk on the date of the consummation of such Blackhawk Distribution.

On April 14, 2014, Safeway consummated the Blackhawk Distribution.

During the period from March 7, 2014 to May 23, 2014, the Company was served with 14 lawsuits purportedly brought on behalf of the Company stockholder class. On June 13, 2014, the parties to the Delaware Action reached an agreement-in-principle providing for a settlement of all of the claims in the Delaware Action on the terms and conditions set forth in a memorandum of understanding (the “Memorandum of Understanding”). Pursuant to the Memorandum of Understanding, among other things: (i) the Board amended the Merger Agreement (“Amendment No. 2”) to (A) change the terms of the PDC CVR Agreement so that, among other things, the PDC Holders would, instead of not receiving any value for any PDC assets that remain unsold at the end of the PDC Sale Deadline, be entitled to the fair market value of the unsold PDC assets, after the payment of certain fees, expenses and debt repayments, and net of certain assumed taxes (based on a 39.25% rate) and (B) change the terms of the Casa Ley CVR Agreement to, among other things, reduce the Casa Ley Sale Deadline from four years to three years and provide that in the event that any equity interests of Casa Ley owned by the Company remain unsold as of the Casa Ley Sale Deadline, the fair market value determination to be made either mutually by the Company and the Shareholder Representative or by an independent investment banking firm shall exclude any minority, liquidity or similar discount regarding such equity interests relative to the value of Casa Ley in its entirety; (ii) the Board adopted an amendment to the Company Rights Agreement (the “Company Rights Agreement Amendment”) to accelerate the expiration date of the Company Rights Agreement; and (iii) the Company made certain changes to this Proxy Statement.

On June 13, 2014, the Board held a special meeting to consider the Memorandum of Understanding and Amendment No. 2. Goldman Sachs discussed the changes to the Merger Agreement set forth in Amendment No. 2 and advised the Board orally, which advice was confirmed in writing, that, based upon and subject to the factors and assumptions stated therein, had Goldman Sachs issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed. Greenhill discussed the changes to the Merger Agreement set forth in Amendment No. 2 and advised the Board orally, which advice was confirmed in writing, to the effect that had Greenhill issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed. The Board also considered the termination of the Company Rights Agreement and determined that, as a result of the Merger Agreement, Safeway no longer needed the Company Rights Agreement to ensure the fair and equal treatment of all stockholders or to ensure that Safeway’s strategic

 

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plans were not interrupted. The Board approved and adopted the Memorandum of Understanding, Amendment No. 2 and the Company Rights Agreement Amendment. The terms and conditions of the settlement remain subject to the approval of the Delaware Chancery Court.

Recommendation of the Board; Reasons for Recommending the Approval and Adoption of the Merger Agreement

Recommendation of the Company’s Board of Directors

The Board, at a meeting described above on March 6, 2014, unanimously:

 

    determined that the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement were fair to, advisable and in the best interests of the Company and its stockholders, and

 

    subject to the terms of the Merger Agreement, recommended that our stockholders approve and adopt the Merger Agreement at the Annual Meeting.

THE BOARD UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE “FOR” APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.

Reasons for Recommending the Approval and Adoption of the Merger Agreement

In reaching these determinations, the Board considered a number of factors, including the following material factors:

 

    the Board’s knowledge and understanding of the business, operations, management, financial condition, earnings and prospects of the Company, including the prospects of the Company as an independent entity;

 

    management’s views on guidance for full fiscal year 2014 performance and the Company’s long-term financial projections;

 

    the Board’s concern that without a substantial transaction, the Company common stock would continue to trade at a discount compared to peer companies;

 

    the risks of remaining independent and the uncertainties associated with pursuing the Company’s strategic business plan in light of the Company’s competitive position in its industry, potential for future growth, and current acquisition strategy;

 

    the Board’s assessment, based in part on the advice of certain of the Company’s advisors, regarding what the Company would need to do to maintain and improve its competitiveness on a standalone basis and the risks involved in developing and executing a plan to maintain and improve its competitiveness on a standalone basis;

 

    the Company’s financial performance over the previous five years, which included declining operating profit and EBITDA, which in the Board’s view increased the risks that the Company would achieve its long-term goals as a standalone company;

 

    the significant increase in competition within the Company’s core industry and expansion of many different competitive retail food channels in the geographic regions in which the Company operates;

 

   

the current and historical market price of the Company common stock, including the fact that the sum of the Per Share Merger Consideration and the value of the Blackhawk Class B Common Stock to be distributed to Company stockholders in the Blackhawk Distribution, which the Board estimated in February 2014 to be between $40.58 and $40.90, (i) represents a 43.7% - 44.8% premium to the price

 

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of $28.24, which was the closing price of shares of Company common stock on September 16, 2013, the last full trading day before JANA Partners filed a Schedule 13D reporting a 6.2% ownership stake in the Company, a 53.4% - 54.6% premium to the Company’s 30-day trading average ($26.45) to September 16, 2013, and a 60.1% - 61.3% premium to the Company’s 90-day trading average ($25.35) to September 16, 2013, (ii) represents a 17.2% - 18.2% premium to the price of $34.61, which was the closing price of shares of Company common stock on February 19, 2014, the last full trading day before the public announcement by the Company that the Company was in discussions concerning a possible transaction involving the sale of the Company, a 27.5% - 28.5% premium to the Company’s 30-day trading average ($31.82) to February 19, 2014, and a 24.6% - 25.6% premium to the Company’s 90-day trading average ($32.56) to February 19, 2014 and (iii) represents a 69.5% - 70.8% premium to the price of $23.94, which was the closing price of shares of Company common stock on March 6, 2013, the date that is one year prior to the signing of the Merger Agreement, an 85.9% - 87.3% premium to the Company’s 30-day trading average ($21.83) to March 6, 2013, and a 108.1% - 109.7% premium to the Company’s 90-day trading average ($19.50) to March 6, 2013;

 

    the fact that there were numerous published media and market rumors beginning in the fourth quarter of 2013 that the Company was for sale or pursuing strategic alternatives, including an October 22, 2013 report published by Reuters stating that a handful of private equity firms, including Cerberus, were exploring a transaction to acquire all or part of Safeway, that the Company announced on February 19, 2014 that it was in discussions concerning a possible sale, and that on March 6, 2014 the Company announced the Merger Agreement, including a 21-day go-shop period during which the Company and Goldman Sachs actively solicited and encouraged, and engaged in discussions with strategic companies and private equity firms regarding, alternative proposals, and during all this time no other interested party emerged that was willing to pursue a sale transaction for the Company for consideration in excess of the Per Share Merger Consideration;

 

    the principal terms of the proposed Merger Agreement, including, among others, the Per Share Merger Consideration to be received by holders of Company common stock, the limited conditions to the obligations of the parties to the Merger Agreement to consummate the Merger, the reverse termination fee payable by the Parent Entities in the event of a regulatory or financing failure resulting in termination of the Merger Agreement, and the ability of the Company to conduct an additional post-signing “market check” through the go-shop provisions;

 

    the opinion of Goldman Sachs, delivered to the Board on March 6, 2014, and subsequently confirmed in writing, to the effect that, as of March 6, 2014 and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to the holders of the Company common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders, and the confirmatory letter of Goldman Sachs, dated June 13, 2014, confirming that, based upon and subject to the factors and assumptions stated therein, had Goldman Sachs issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed;

 

    the opinion of Greenhill, delivered to the Board on March 6, 2014, and subsequently confirmed in writing, to the effect that, as of March 6, 2014 and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the sum of (i) the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be received by the holders of the Company common stock pursuant to the Merger Agreement and (ii) the separate per share distribution to the holders of shares of Company common stock in the Blackhawk Distribution was fair, from a financial point of view, to such holders, and the confirmatory letter of Greenhill, dated June 13, 2014, confirming that, based upon and subject to the factors and assumptions stated therein, had Greenhill issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed;

 

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    the Board’s evaluation of possible alternatives to a sale to the Parent Entities (including pursuing the Company’s standalone plan or a stock buyback or dividend), which the Board evaluated with the assistance of Goldman Sachs, and the Board’s determination that the Merger and the receipt of the Per Share Merger Consideration are more favorable to our stockholders than any such possible alternatives, which the Board determined were not likely to present superior opportunities for the Company to create greater value for our stockholders, given the potential risks, rewards and uncertainties associated therewith;

 

    the terms of the CVRs and the fact that the Shareholder Representative will be responsible for conducting and consummating the sale process of both the Casa Ley Interest and the PDC assets and will have certain consent rights relating to the control of Casa Ley and the PDC assets, as discussed in more detail under “Casa Ley Contingent Value Rights Agreement” beginning on page 154 and “PDC Contingent Value Rights Agreement” beginning on page 161;

 

    the likelihood that the Merger would be completed based on, among other things:

 

  ¡    the likelihood and anticipated timing of completing the Merger in light of the scope of the closing conditions;

 

  ¡    the fact that the Parent Entities have obtained committed debt and equity financing for the transaction, the limited number and nature of the conditions to the debt and equity financing, the reputation of the financing sources and the obligation of the Parent Entities to use their reasonable best efforts to obtain the financing;

 

  ¡    the fact that the Merger Agreement provides that, in the event of a failure of the closing of the Merger under certain circumstances, the Parent Entities will, jointly and severally, pay the Company a $400 million termination fee, as described under “The Merger Agreement—Effect of Termination” beginning on page 145, without the Company having to establish any damages, the payment of which is guaranteed pursuant to a limited guaranty between the equity sponsors of the Parent Entities and the Company, as described under “Proposal 1—The Merger—Financing of the Merger—Limited Guarantee” beginning on page 106;

 

  ¡    the equity commitments of Cerberus and the Co-Investors, the reputation of Albertson’s LLC, and the Parent Entities’ ability to complete large acquisition transactions; and

 

  ¡    the Company’s right, in certain circumstances, to specifically enforce the Parent Entities’ obligations; and

 

    the other terms of the Merger Agreement and the related agreements, including:

 

  ¡    the Company’s ability during the go-shop period (which expired on March 27, 2014) to initiate, solicit and encourage any inquiry or any acquisition proposals from third parties and to engage in, enter into, or otherwise participate in any discussions or negotiations with any third parties in connection with any such inquiries or proposals;

 

  ¡    the Company’s ability during the excluded party period, which would have begun after the expiration of the go-shop period and expired on April 12, 2014, to continue soliciting, encouraging, engaging in, entering into or otherwise participating in any discussions or negotiations with certain excluded parties, if the Company had received during the go-shop period a written acquisition proposal that the Board determined in good faith after consultation with its financial advisors and outside legal counsel constituted or could reasonably have been expected to lead to a superior proposal (as described in “The Merger Agreement—Solicitation of Transactions—Termination for Superior Proposals and Company Adverse Recommendation Change” beginning on page 137);

 

  ¡    the Company’s ability to respond to an acquisition proposal received after the end of the go-shop period if the Board determines in good faith (after consultation with its financial advisors and outside counsel) that such acquisition proposal either constitutes a superior proposal or would reasonably be expected to result in a superior proposal and that the failure to take such action would be inconsistent with the Board’s fiduciary duties; and

 

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  ¡    the Company’s ability to terminate the Merger Agreement to enter into a superior proposal, subject to certain conditions and payment of a termination fee of $250 million, which would have been $150 million during the go-shop or for 15 days thereafter with respect to any qualifying excluded parties if they had made an acquisition proposal during the go-shop period, as described under “The Merger Agreement—Effect of Termination” beginning on page 145.

The Board also considered a number of factors that are discussed below relating to the procedural safeguards that the Board believes were and are present to ensure the fairness of the Merger. The Board believes these factors support its determinations and recommendations and provide assurance of the procedural fairness of the Merger to the Company and its stockholders:

 

    the Company’s and its advisors’ extensive negotiations with Cerberus and Albertson’s LLC which, among other things, resulted in an increase to the total Per Share Merger Consideration (which, when combined with the value of the Blackhawk Class B common stock to be distributed to Company stockholders in the Blackhawk Distribution, Safeway estimated in February 2014 as between $40.58 to $40.90 per share of Company common stock) and resulted in what the Board believes are significantly better contractual terms than those initially proposed by Cerberus and Albertson’s LLC;

 

    the fact that, as of the execution of the Merger Agreement, members of senior management were not party to any binding agreements with the Parent Entities regarding their post-Closing employment with or equity participation in the surviving corporation or its affiliates;

 

    the Merger Agreement must be approved and adopted by the affirmative vote of the holders as of the record date of a majority of the outstanding shares of the Company common stock;

 

    the Company’s ability during the go-shop period (which expired on March 27, 2014) to initiate, solicit and encourage any inquiry or any acquisition proposals from third parties and to engage in, enter into, or otherwise participate in any discussions or negotiations with any third parties in connection with any such inquiries or proposals;

 

    the Company’s ability during the excluded party period, which would have begun after the expiration of the go-shop period and expired on April 12, 2014, to continue soliciting, encouraging, engaging in, entering into or otherwise participating in any discussions or negotiations with certain excluded parties, if the Company had received during the go-shop period a written acquisition proposal that the Board determined in good faith after consultation with its financial advisors and outside legal counsel constituted or could reasonably have been expected to lead to a superior proposal;

 

    the Company’s ability to respond to an acquisition proposal received after the end of the go-shop period if the Board determines in good faith (after consultation with its financial advisors and outside counsel) that such acquisition proposal either constitutes a superior proposal or would reasonably be expected to result in a superior proposal and that the failure to take such action would be inconsistent with the Board’s fiduciary duties;

 

    the Company’s ability to terminate the Merger Agreement to enter into a superior proposal, subject to certain conditions and payment of a termination fee of $250 million, which would have been $150 million during the go-shop period or for 15 days thereafter with respect to any qualifying excluded parties if they had made an acquisition proposal during the go-shop period, as described under “The Merger Agreement—Effect of Termination” beginning on page 145;

 

   

the fact that there were numerous published media and market rumors beginning in the fourth quarter of 2013 that the Company was for sale or pursuing strategic alternatives, including an October 22, 2013 report published by Reuters stating that a handful of private equity firms, including Cerberus, were exploring a transaction to acquire all or part of Safeway, that the Company announced on February 19, 2014 that it was in discussions concerning a possible sale, and that on March 6, 2014 the Company announced the Merger Agreement, including a 21-day go-shop period during which the Company and Goldman Sachs actively solicited and encouraged, and engaged in discussions with strategic companies

 

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and private equity firms regarding, alternative proposals, and during all this time no other interested party emerged that was willing to pursue a sale transaction for the Company for consideration in excess of the Per Share Merger Consideration;

 

    the opinion of Goldman Sachs, delivered to the Board on March 6, 2014, and subsequently confirmed in writing, to the effect that, as of March 6, 2014 and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to the holders of the Company common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders, and the confirmatory letter of Goldman Sachs, dated June 13, 2014, confirming that, based upon and subject to the factors and assumptions stated therein, had Goldman Sachs issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed – See “—Opinion of Goldman, Sachs & Co., Financial Advisor to the Board” on page 76;

 

    the opinion of Greenhill, delivered to the Board on March 6, 2014, and subsequently confirmed in writing, to the effect that, as of March 6, 2014 and based upon and subject to the factors, procedures, assumptions, qualifications and limitations set forth therein, the sum of (i) the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be received by the holders of the Company common stock pursuant to the Merger Agreement and (ii) the separate per share distribution to the holders of shares of the Company common stock in the Blackhawk Distribution was fair, from a financial point of view, to such holders, and the confirmatory letter of Greenhill, dated June 13, 2014, confirming that, based upon and subject to the factors and assumptions stated therein, had Greenhill issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed – See “—Opinion of Greenhill & Co., LLC, Financial Advisor to the Board” on page 89; and

 

    the availability of appraisal rights under Section 262 of the DGCL to holders of shares of Company common stock who comply with all of the required procedures under the DGCL, which allows such holders to seek appraisal of the fair value of their shares as determined by the Delaware Court of Chancery.

In the course of its deliberations, the Board also considered a variety of uncertainties, risks and other countervailing factors concerning the Merger Agreement and the Merger, including:

 

    that the Company may be unable to obtain stockholder approval as required for the transactions contemplated by the Merger Agreement;

 

    the risk that any other conditions to the closing of the Merger and the transactions contemplated by the Merger Agreement may not be satisfied (many of which are not within either the Company’s or the Parent Entities’ control);

 

    that any required approvals of governmental authorities required pursuant to the Merger Agreement that are granted may impose requirements, limitations, costs or restrictions on the Company and the Parent Entities, or may require significant changes to the structure, terms or conditions of the Merger to obtain such approval, any of which may result in a material delay in, or the abandonment of, the Merger;

 

    the risk that the proposed Merger will not occur if the financing contemplated by the financing commitments, described under “—Financing of the Merger—Debt Financing” beginning on page 106, is not obtained, as the Parent Entities do not on their own possess sufficient funds to complete the transaction;

 

    other risks to closing of the Merger, including the risk that the Merger will not be consummated within the expected time period, which may lead to termination of the Merger Agreement pursuant to the termination rights granted to both the Company and the Parent Entities under the Merger Agreement, as described under “The Merger Agreement—Termination” beginning on page 144;

 

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    the potential negative effect that the pendency of the Merger, or a failure to complete the Merger, could have on the Company’s business and relationships with its employees, customers, suppliers, regulators and the communities in which it operates;

 

    the risks and costs to the Company if the proposed Merger does not close, including the diversion of management and employee attention, potential employee attrition and the potential disruptive effect on business and customer relationships;

 

    that amounts that may be payable by the Company upon the termination of the Merger Agreement could discourage other potential acquirors from making a competing bid to acquire the Company, including up to $250 million as a termination fee payable if the Company terminates the Merger Agreement to accept a superior proposal, as described under “The Merger Agreement—Effect of Termination” beginning on page 145;

 

    that the Company may be required, if the Merger is not completed, to pay its own expenses associated with the Merger Agreement, the Merger and the other transactions contemplated thereby, such as legal, accounting, financial adviser and printing fees, as well as, under the circumstances described above, Parent’s expenses and the applicable termination fee;

 

    that the Company’s sole damages remedy in the event of a breach of the Merger Agreement by the Parent Entities is generally limited to the receipt of the $400 million termination fee;

 

    that the transactions contemplated by the Merger Agreement may involve other unexpected costs, liabilities or delays;

 

    that the CVRs may yield little or no value to the Casa Ley CVR Holders or the PDC CVR Holders;

 

    the illiquidity of the CVRs, which are subject to restrictions on transfer and are not registered under any federal or state securities laws;

 

    that a cash transaction will be taxable to the Company’s stockholders that are U.S. holders for U.S. federal income tax purposes; and

 

    the risks of the type and nature described under “Cautionary Statement Concerning Forward-Looking Statements” beginning on page 37.

In addition, the Board was aware of and considered the interests that certain of our directors and executive officers have with respect to the Merger that may differ from, or are in addition to, their interests as stockholders of the Company. See “—Interests of the Company’s Directors and Executive Officers in the Merger” and “Merger-Related Compensation” beginning on pages 110 and 172, respectively.

The foregoing discussion of the information and factors considered by the Board is not intended to be exhaustive, but the Board believes it addresses the material factors considered by the Board in its consideration of the Merger, including factors that may support the Merger as well as factors that may weigh against it. In view of the variety of factors and the amount of information considered, the Board did not find it practicable to, and did not make specific assessments of, quantify or otherwise assign relative weights to, the specific factors considered in reaching its determination. In addition, the Board did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, and individual members of the Board may have given different weights to the above factors.

Opinion of Goldman, Sachs & Co., Financial Advisor to the Board

Goldman Sachs rendered its opinion to the Board that, as of March 6, 2014, and based upon and subject to the factors and assumptions set forth therein, the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to the holders of shares of Company common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders. On June 13, 2014, Goldman Sachs delivered a

 

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letter to the Board confirming that, based upon and subject to the factors and assumptions stated therein, had Goldman Sachs issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed. The confirmatory letter did not address any circumstances, developments or events occurring after March 6, 2014, other than the execution of Amendment No. 1 and Amendment No. 2, and its opinion is provided only as of such date. In connection with delivery of the confirmatory letter, the Board advised Goldman Sachs, and with the Board’s permission, Goldman Sachs assumed, that the changes to the Merger Agreement pursuant to Amendment No. 1 and Amendment No. 2 did not affect the Projections.

The full text of the written opinion of Goldman Sachs, dated March 6, 2014, and the confirmatory letter, dated June 13, 2014, which set forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion and the confirmatory letter, respectively, are attached to this Proxy Statement as Annex E and are incorporated herein by reference. Goldman Sachs provided its opinion for the information and assistance of the Board in connection with its consideration of the transactions contemplated by the Merger Agreement. The Goldman Sachs opinion is not a recommendation as to how any holder of shares of Company common stock should vote with respect to the transactions contemplated by the Merger Agreement, or any other matter. Goldman Sachs expressed no opinion as to the value of the shares of Blackhawk Class A common stock or Class B common stock or as to the fairness or any other aspect of the distribution of such shares in the Blackhawk Distribution.

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

    the Merger Agreement;

 

    the Casa Ley CVR Agreement;

 

    the PDC CVR Agreement;

 

    annual reports to stockholders and Annual Reports on Form 10-K of Safeway for the 52-weeks ended December 28, 2013, December 29, 2012, December 31, 2011, January 1, 2011 and January 2, 2010;

 

    certain interim reports to stockholders and Quarterly Reports on Form 10-Q of Safeway;

 

    certain publicly available research analyst reports for Safeway;

 

    certain other communications from Safeway to its stockholders; and

 

    certain internal financial analyses and forecasts for Safeway after giving effect to the Blackhawk Distribution, the Entire Casa Ley Sale (as defined below) and the Entire PDC Sale (as defined below), and an estimate as to the minimum amount of the Assumed CVR Cash Proceeds (as defined below) and the timing of payment thereof, in each case, as prepared by Safeway’s management and approved for Goldman Sachs’ use by Safeway, which are referred to as the “Projections” (as defined under “—Prospective Financial Information” below).

Goldman Sachs also held discussions with members of senior management of Safeway regarding their assessment of the strategic rationale for, and the potential benefits of, the transactions contemplated by the Merger Agreement, and the past and current business operations, financial condition, and future prospects of Safeway; reviewed the reported price and trading activity for the Company common stock; compared certain financial and stock market information for Safeway with similar information for certain other companies the securities of which are publicly traded; reviewed the financial terms of certain recent business combinations in the grocery retail industry and in other industries; and performed such other studies and analyses, and considered such other factors, as it deemed appropriate.

For purposes of rendering this opinion, Goldman Sachs, with Safeway’s consent, relied upon and assumed the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by, it, without assuming any responsibility for independent verification

 

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thereof. In that regard, Goldman Sachs assumed with Safeway’s consent that the Projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of Safeway. Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or other off-balance-sheet assets and liabilities) of Safeway or any of its subsidiaries, including without limitation, the Casa Ley Interest and PDC, and it was not furnished with any such evaluation or appraisal. Goldman Sachs assumed that (i) all governmental, regulatory or other consents and approvals necessary for the closing of the Merger Agreement will be obtained without any adverse effect on Safeway or on the expected benefits of the transactions contemplated by the Merger Agreement in any way meaningful to its analysis and (ii) that the Blackhawk Distribution is effected prior to the closing of the Merger. Goldman Sachs has also assumed that the transactions contemplated by the Merger Agreement will be consummated on the terms set forth in the Merger Agreement, the Casa Ley CVR Agreement, and the PDC CVR Agreement without the waiver or modification of any term or condition the effect of which would be in any way meaningful to its analysis. Goldman Sachs assumed, at Safeway’s instruction, that the aggregate amount of the Casa Ley Cash Consideration, the PDC Cash Consideration, the Casa Ley CVR Payment Amount and the PDC CVR Payment Amount (in each case, if applicable) was not less than $3.44 per Share (collectively, the “Assumed CVR Cash Proceeds”). There can be no assurance that there will be any sale of the Casa Ley Interest and/or the PDC assets or that the Assumed CVR Cash Proceeds is indicative of what the actual aggregate proceeds of one or more sales of the Casa Ley Interest and/or the PDC assets will be. Although Goldman Sachs included the Assumed CVR Cash Proceeds in its analyses, Goldman Sachs did not make an independent evaluation or appraisal of the Casa Ley Interest or PDC and expressed no opinion as to the likelihood that a sale of the Casa Ley Interest and/or the PDC assets will be achieved, or as to the actual amount of the net proceeds thereof, if any, that may be received with any such sale.

Goldman Sachs’ opinion does not address the underlying business decision of Safeway to engage in the transactions contemplated by the Merger Agreement or the Blackhawk Distribution, or the relative merits of the transactions contemplated by the Merger Agreement as compared to any strategic alternatives that may be available to Safeway; nor does it address any legal, regulatory, tax or accounting matters that might result from the transactions contemplated by the Merger Agreement or the Blackhawk Distribution. Goldman Sachs’ opinion addresses only the fairness from a financial point of view to the holders of shares of Company common stock, as of the date of the opinion, of the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to such holders pursuant to the Merger Agreement. Goldman Sachs’ opinion does not express any view on, and does not address, any other term or aspect of the Merger Agreement, the Casa Ley CVR Agreement, the PDC CVR Agreement or the transactions contemplated by the Merger Agreement or any term or aspect of any other agreement or instrument contemplated by the Merger Agreement, the Casa Ley CVR Agreement or the PDC CVR Agreement or entered into or amended in connection with the transaction, including, the Blackhawk Distribution, the fairness of the transactions contemplated by the Merger Agreement to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of Safeway; nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of Safeway, or class of such persons, in connection with the transactions contemplated by the Merger Agreement, whether relative to the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to the holders of shares of Company common stock pursuant to the Merger Agreement or otherwise. In addition, Goldman Sachs does not express any opinion as to the prices at which shares of Class A common stock or Class B common stock of Blackhawk will trade following the closing of the Blackhawk Distribution or as to the impact of the transactions contemplated by the Merger Agreement on the solvency or viability of Safeway, Ultimate Parent or Blackhawk or the ability of Safeway, Ultimate Parent or Blackhawk to pay their respective obligations when they come due. Goldman Sachs’ opinion was necessarily based on economic, monetary market and other conditions, as in effect on, and the information made available to it as of the date of the opinion, and Goldman Sachs assumed no responsibility for updating, revising or reaffirming its opinion based on circumstances, developments or events occurring after the date of its opinion. Goldman Sachs’ opinion was approved by a fairness committee of Goldman Sachs.

 

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The following is a summary of the material financial analyses delivered by Goldman Sachs to the Board in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs, nor does the order of analyses described represent relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Goldman Sachs’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before February 28, 2014, and is not necessarily indicative of current market conditions.

Implied Premium and Multiples Analysis. Goldman Sachs calculated the premium represented by the aggregate of (i) the Initial Cash Merger Consideration of $32.50 per share of Company common stock, (ii) the Assumed CVR Cash Proceeds of $3.44 per share, (iii) the value attributable to Safeway’s pro-rata ownership of the shares of Blackhawk Class B common stock distributed in the Blackhawk Distribution of $3.98 per share, which was based on the $24.78 per share closing price of Blackhawk Class A common stock on February 28, 2014, and (iv) the present value of Safeway’s pro-rata share of the tax savings to Blackhawk from the tax basis step-up related to the Blackhawk Distribution of $0.71 per share, which was based on the tax deductions to Blackhawk over time (referred to as “Safeway WholeCo”), or a combined $40.63 per share of Company common stock, to the following reference share prices of Company common stock:

 

    the closing price per share of Company common stock on each of February 28, 2014 and January 31, 2014;

 

    the undisturbed closing price per share of Company common stock on September 16, 2013, which was the last trading day prior to Safeway’s adoption of the Company Rights Agreement;

 

    the highest closing price per share of Company common stock for the 52-weeks ended February 28, 2014;

 

    the one-month average per share price of Company common stock;

 

    the twelve-month average per share price of Company common stock; and

 

    the volume weighted average per share price of Company common stock for the 52-weeks ended February 28, 2014.

By multiplying the equity value of Safeway WholeCo, or $40.63 per share, by the total number of fully diluted outstanding shares of Company common stock calculated using the treasury method, Goldman Sachs derived an implied equity value of Safeway WholeCo of approximately $9.6 billion. Goldman Sachs then added to this implied equity value Safeway’s total adjusted net debt balance of $1.3 billion and derived an implied enterprise value of Safeway WholeCo of approximately $10.9 billion.

Using the results of the calculations described above, Safeway WholeCo’s actual financial results for the 52-weeks ended December 28, 2013 (“FY 2013”) reflected in Safeway’s publicly filed financial statements, the Projections for the 53-weeks ending January 3, 2015 (“FY 2014E”) and the 52-weeks ending January 2, 2016 (“FY 2015E”) and selected estimates for Safeway WholeCo’s FY 2014E and FY 2015E financial results published by Institutional Brokers’ Estimate System (“IBES”), Goldman Sachs calculated the following EBITDA multiples:

 

    the implied enterprise value as a multiple of Safeway WholeCo’s earnings before interest, taxes, depreciation and amortization (“EBITDA”) for FY 2013, (i) excluding the Blackhawk tax liability, and (ii) including the Blackhawk tax liability, where the estimated tax liability of $371.0 million is calculated as the total tax liability due to the Blackhawk Distribution based on realization of a tax basis step-up, certain assumptions provided by Safeway and the trading price of shares of Blackhawk Class A common stock on February 28, 2014; and

 

    the implied enterprise value as a multiple of Safeway WholeCo’s estimated EBITDA for FY 2014E and FY 2015E published by IBES and Safeway WholeCo’s estimated EBITDA for FY 2014E and FY 2015E contained in the Projections.

 

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The results of these analyses are summarized as follows:

 

Premium to:

  

Closing price per share of Company common stock on February 28, 2014 ($37.45)

     8.5%   

Closing price per share of Company common stock on January 31, 2014 ($31.24)

     30.1%   

Undisturbed closing price per share of Company common stock on September 16, 2013 ($28.24)

     43.9%   

Highest closing price per share of Company common stock for the 52-weeks ended February 28, 2014 ($38.06)

     6.8%   

One-month average per share price of Company common stock, calculated as of February 28, 2014 ($33.44)

     21.5%   

Twelve-month average per share price of Company common stock, calculated as of February 28, 2014 ($28.63)

     42.0%   

Volume weighted average price per share of Company common stock for the 52-weeks ended February 28, 2014 ($28.55)

     42.3%   

Enterprise Value / EBITDA:

  

FY 2013, excluding Blackhawk tax liability

     6.8x   

FY 2013, including Blackhawk tax liability

     7.1x   

FY 2014E – IBES

     6.7x   

FY 2015E – IBES

     6.6x   

FY 2014E – Management’s Projections

     6.6x   

FY 2015E – Management’s Projections

     6.2x   

Goldman Sachs also calculated the premium represented by the aggregate of (i) the Initial Cash Merger Consideration of $32.50 per share, and (ii) the Assumed CVR Cash Proceeds of $3.44 per share (referred to as “Safeway Ex-Blackhawk”), or a combined $35.94 per share, to the following reference share prices of Company common stock, in each case adjusted for the pro-rata value per share of Safeway’s ownership of Blackhawk Class B common stock:

 

    the closing price per share of Company common stock on each of February 28, 2014 and January 31, 2014;

 

    the undisturbed closing price per share of Company common stock on September 16, 2013, which was the last trading day prior to Safeway’s adoption of the Company Rights Agreement;

 

    the highest closing price per share of Company common stock for the period from April 19, 2013, which was the first trading day after the initial public offering of Blackhawk Class A common stock, to February 28, 2014;

 

    the one-month average per share price of Company common stock; and

 

    the volume weighted average price per share of Company common stock for the period from April 19, 2013, which was the first trading day after the initial public offering of Blackhawk Class A common stock, to February 28, 2014.

By multiplying the equity value of Safeway Ex-Blackhawk, or $35.94 per share, by the total number of fully diluted outstanding shares of Company common stock calculated using the treasury method, Goldman Sachs derived an implied equity value of Safeway Ex-Blackhawk of approximately $8.5 billion. Goldman Sachs then added to this implied equity value Safeway’s total adjusted net debt balance of $1.3 billion and derived an implied enterprise value of Safeway Ex-Blackhawk of approximately $9.8 billion.

Using the results of the calculations described above, Safeway Ex-Blackhawk’s actual financial results for FY 2013 reflected in Safeway’s and Blackhawk’s publicly filed financial statements and the Projections for FY 2014E and FY 2015E, Goldman Sachs calculated the following EBITDA multiples:

 

    the implied enterprise value as a multiple of Safeway Ex-Blackhawk’s EBITDA for FY 2013, (i) excluding the Blackhawk tax liability, and (ii) including the Blackhawk tax liability; and

 

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    the implied enterprise value as a multiple of Safeway Ex-Blackhawk’s estimated EBITDA for FY 2014E and FY 2015E contained in the Projections.

The results of these analyses are summarized as follows:

 

Premium to:

  

Closing price per share of Company common stock on February 28, 2014 ($33.38(1))

     7.7%   

Closing price per share of Company common stock on January 31, 2014 ($27.11(1))

     32.5%   

Undisturbed closing price per share of Company common stock on September 16, 2013 ($24.33(1))

     47.7%   

Highest closing price per share of Company common stock from April 19, 2013 through February 28, 2014 ($33.38(1))

     7.7%   

One-month average per share price of Company common stock, calculated as of February 28, 2014 ($29.38(1))

     22.3%   

Volume weighted average price per share of Company common stock from April 19, 2013 through February 28, 2014 ($24.60(1))

     46.1%   

Enterprise Value / EBITDA:

  

FY 2013, excluding Blackhawk tax liability

     6.6x   

FY 2013, including Blackhawk tax liability

     6.9x   

FY 2014E – Management’s Projections

     6.4x   

FY 2015E – Management’s Projections

     6.0x   

 

(1) Represents the closing price per share of Company common stock less the pro-rata value per share of Safeway’s ownership of Blackhawk Class B common stock. Pro-rata value per share of Blackhawk Class B common stock was calculated based on the closing price per share of Blackhawk Class A Common Stock, the approximately 37.8 million shares of Blackhawk Class B common stock owned by Safeway and the fully diluted outstanding shares of Company common stock.

Goldman Sachs also calculated certain multiples, assuming the closing of the Blackhawk Distribution but not including the Assumed CVR Cash Proceeds (referred to as “U.S. Grocery”). By multiplying the Initial Cash Merger Consideration of $32.50 per share of Company common stock by the total number of fully diluted outstanding shares of Company common stock calculated using the treasury method, Goldman Sachs derived an implied equity value of U.S. Grocery of approximately $7.7 billion. Goldman Sachs then added to this implied equity value Safeway’s total adjusted net debt balance of $1.3 billion and derived an implied enterprise value of U.S. Grocery of approximately $9.0 billion.

Using the results of the calculations described above, Safeway’s actual financial results for FY 2013 reflected in Safeway’s publicly filed financial statements and the Projections for FY 2014E and FY 2015E, Goldman Sachs calculated the following EBITDA multiples:

 

    the implied enterprise value as a multiple of U.S. Grocery’s EBITDA for FY 2013, (i) excluding the Blackhawk tax liability, and (ii) including the Blackhawk tax liability; and

 

    the implied enterprise value as a multiple of U.S. Grocery’s estimated EBITDA for FY 2014E and FY 2015E contained in the Projections.

The results of these analyses are summarized as follows:

 

Enterprise Value / EBITDA:

  

FY 2013, excluding Blackhawk tax liability

     6.5x   

FY 2013, including Blackhawk tax liability

     6.8x   

FY 2014E – Management’s Projections

     6.2x   

FY 2015E – Management’s Projections

     6.0x   

 

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Goldman Sachs also calculated the equity value as a multiple of (i) Safeway Ex-Blackhawk’s estimated net income for FY 2014E and FY 2015E contained in the Projections of 32.3x and 25.4x, respectively, and (ii) U.S. Grocery’s estimated net income for FY 2014E and FY 2015E contained in the Projections of 34.2x and 27.5x, respectively. Following Goldman Sachs’ presentation to the Board on March 6, 2014, it was discovered that these multiples were incorrectly calculated and should have resulted in the equity value as a multiple of (i) Safeway Ex-Blackhawk’s estimated net income for FY 2014E and FY 2015E contained in the Projections of 27.9x and 22.0x, respectively, and (ii) U.S. Grocery’s estimated net income for FY 2014E and FY 2015E contained in the Projections of 30.4x and 24.2x, respectively. Goldman Sachs has confirmed to Safeway and its Board that such corrected equity value to estimated net income multiples were not material to its fairness analysis and would not have changed the conclusion set forth in its fairness opinion.

Selected Companies Analysis. Goldman Sachs reviewed and compared certain financial information, ratios and public market multiples for Safeway WholeCo and Safeway Ex-Blackhawk to the corresponding financial information, ratios and public market multiples for the following publicly traded corporations in the grocery retail industry (collectively referred to as the selected companies):

 

    The Kroger Co.;

 

    SUPERVALU INC.;

 

    Roundy’s Inc.;

 

    Ingles Markets Inc.;

 

    Harris Teeter Supermarkets, Inc.;

 

    Etablissements Delhaize Frères et Cie “Le Lion” (Delhaize Group); and

 

    Koninklijke Ahold NV (Ahold).

Although none of the selected companies is directly comparable to Safeway WholeCo or Safeway Ex-Blackhawk, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of Safeway WholeCo and Safeway Ex-Blackhawk.

Goldman Sachs calculated and compared various financial multiples and ratios based on information it obtained from estimates from IBES, research analyst reports and market information as of February 28, 2014 (with all estimates calendarized to December). With respect to each of (i) the selected companies, (ii) Safeway WholeCo and (iii) Safeway Ex-Blackhawk, Goldman Sachs calculated the following EBITDA multiples:

 

    enterprise value as a multiple of EBITDA for the last twelve-months ended December 31, 2009 to December 31, 2013;

 

    enterprise value as a multiple of the estimated one-year forward EBITDA for each company from 2009 to 2013, based on data published by Bloomberg, Capital IQ and IBES; and

 

    enterprise value as a multiple of estimated EBITDA for the twelve-months ending December 31, 2014 and 2015.

 

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The results of these analyses are summarized as follows:

 

     Enterprise Value as a Multiple of:
     2013
EBITDA
   2014 Est.
EBITDA
   2015 Est.
EBITDA

Selected Companies:

        

The Kroger Co.

   6.8x    6.6x    6.4x

SUPERVALU

   5.9x    5.9x    5.7x

Roundy’s Inc.

   5.5x    5.7x    5.2x

Ingles Markets Inc.

   6.5x    6.9x    6.6x

Delhaize Group

   5.2x    5.1x    5.0x

Ahold

   5.5x    5.5x    5.3x

Range

   5.2x-6.8x    5.1x-6.9x    5.0x-6.6x

Median

   5.7x    5.8x    5.5x

Safeway WholeCo (Disturbed)(1)

   6.2x    6.3x    6.1x

Safeway WholeCo (Undisturbed)(2)

   4.9x    4.9x    4.8x

Safeway (Ex-Blackhawk)(Disturbed)(1)

   6.0x    6.2x    6.1x

Safeway (Ex-Blackhawk)(Undisturbed)(1)

   4.6x    4.7x    4.7x

 

(1) Market information as of February 28, 2014.
(2) Assumes undisturbed price per share of Company common stock of $28.24 per share as of September 16, 2013. Ex-Blackhawk adjusted for the pro-rata value per share of Safeway’s ownership of Blackhawk Class B common stock. Pro-rata value per share of Blackhawk Class B common stock was calculated based on the closing price per share of Blackhawk Class A common stock, the approximately 37.8 million shares of Blackhawk Class B common stock owned by Safeway and the fully diluted outstanding shares of Company common stock.

 

     Enterprise Value / LTM EBITDA Multiple  
     2009 - 2013
Average
     2013
(Pre-Blackhawk IPO)
     2013
(Post-Blackhawk IPO)
 

Safeway WholeCo

     5.0x         4.7x         5.6x   

Safeway Ex-Blackhawk

     N/A         N/A         5.2x   

Selected Companies:

        

The Kroger Co.

     5.6x         5.5x         6.1x   

SUPERVALU

     5.1x         5.8x         7.8x   

Harris Teeter Supermarkets

     6.1x         6.2x         6.8x   

Roundy’s Inc.

     5.2x         4.6x         5.6x   

Ingles Markets Inc.

     6.2x         6.2x         6.8x   

Delhaize Group

     4.8x         4.2x         4.7x   

Ahold

     5.5x         5.6x         5.4x   

Selected Companies Range

     4.8x - 6.2x         4.2x - 6.2x         4.7x - 7.8x   

Selected Companies Median

     5.5x         5.6x         6.1x   

Safeway WholeCo as % of Median

     92%         84%         92%   

 

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     Enterprise Value /One Year Forward EBITDA Multiple
     2009 - 2013
Average
   2013
(Pre-Blackhawk IPO)
   2013
(Post-Blackhawk IPO)

Safeway WholeCo

   5.1x    4.9x    5.3x

Safeway Ex-Blackhawk

   N/A    N/A    5.1x

Selected Companies:

        

The Kroger Co

   5.5x    5.7x    6.3x

SUPERVALU

   4.9x    5.0x    6.2x

Harris Teeter Supermarkets

   5.9x    5.9x    6.7x

Roundy’s Inc.

   5.1x    4.7x    5.6x

Ingles Markets Inc.

   6.5x    6.0x    6.7x

Delhaize Group

   4.7x    4.2x    4.8x

Ahold

   5.5x    5.8x    5.4x

Selected Companies Range

   4.7x- 6.5x    4.2x- 6.0x    4.8x- 6.7x

Selected Companies Median

   5.5x    5.7x    6.2x

Safeway WholeCo as % of Median

   93%    87%    85%

Based on its review of the foregoing calculations and applying its professional judgment, Goldman Sachs applied enterprise value to EBITDA multiples ranges of 4.7x to 5.8x and 4.7x to 5.5x to Safeway Ex-Blackhawk’s 2014E and 2015E EBITDA, respectively, to derive a range of illustrative enterprise values of Safeway Ex-Blackhawk. By subtracting total adjusted net debt for Safeway from this range and dividing by the fully diluted outstanding shares of Company common stock as of December 29, 2013, this resulted in illustrative values per share of Company common stock for Safeway Ex-Blackhawk, rounded to the nearest five cents, ranging from $24.95 to $32.10 and $26.85 to $32.40, respectively. Goldman Sachs also applied the same enterprise value to EBITDA multiples ranges to U.S. Grocery’s 2014E and 2015E EBITDA, respectively, to derive a range of illustrative enterprise values of U.S. Grocery. By subtracting total adjusted net debt for Safeway from this range and dividing by the fully diluted outstanding shares of Company common stock as of December 29, 2013 this resulted in illustrative values per share of Company common stock for U.S. Grocery, rounded to the nearest five cents, ranging from $23.20 to $29.95 and $24.50 to $29.60, respectively.

Selected Transactions Analysis. Goldman Sachs analyzed certain publicly available information relating to the transactions listed below in the retail grocery industry since April 2002.

 

Announced

  

Target

  

Acquiror

   LTM
EBITDA
Multiple
 

Dec. 2013

   Gelson’s Markets (Arden Group, Inc.)    TPG Capital, L.P.      10.8x   

Sept. 2013

   United Supermarkets, LLC    Albertson’s LLC      N/A   

July 2013

   Harris Teeter Supermarkets, Inc.    The Kroger Co.      6.7x   

Jan. 2013

   SUPERVALU Inc. (21.2% stake)    Cerberus led consortium      5.2x   

Jan. 2013

   SUPERVALU retail (New Albertson’s, Inc.)    Ultimate Parent      3.9x   

Dec. 2011

   Winn-Dixie Stores, Inc.    BI-LO, LLC      5.1x   

June 2011

   BJ’s Wholesale Club, Inc.    CVC Capital Partners Limited and Leonard Green & Partners, L.P.      6.4x   

Mar. 2007

   Pathmark Stores, Inc.    The Great Atlantic & Pacific Tea Company      9.9x   

Feb. 2007

   Wild Oats Market, Inc.    Whole Foods Market, Inc.      14.0x   

Feb. 2007

   Smart & Final Inc.    Apollo Global Management, LLC      10.3x   

Apr. 2006

   Marsh Supermarkets, Inc.    Sun Capital Partners, Inc.      8.7x   

Jan. 2006

   Albertsons, Inc. (core food retailing)    SUPERVALU Inc.      7.0x   

Jan. 2006

   Albertsons, Inc. (non-core food retailing)    Cerberus led consortium      4.0x   

Dec. 2004

   BI-LO, LLC/Bruno’s    Lone Star Fund V (U.S.), L.P.      N/A   

Mar. 2004

   Shaw’s Supermarkets, Inc.    Albertson’s, Inc.      N/A   

Apr. 2002

   Roundy’s Supermarkets, Inc.    Willis Stein & Partners L.P.      4.6x   

 

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For each of the selected transactions, Goldman Sachs calculated and compared the implied enterprise value of the target company based on the announced transaction price as a multiple of the target company’s EBITDA for the last twelve-month period prior to the announcement of the transaction. While none of the companies that participated in the selected transactions are directly comparable to U.S. Grocery, the companies that participated in the selected transactions are companies with operations that, for the purposes of analysis, may be considered similar to certain of U.S. Grocery’s results and product profile.

The following table presents the results of this analysis:

 

       Selected Transactions  

Enterprise Value as a Multiple of:

     Range        Median  

LTM EBITDA

       3.9x –14.0x           6.7x   

LTM EBITDA (Post 2007)

            5.8x   

LTM EBITDA (> $1 Billion Enterprise Value)

            6.4x   

Based on its review of the foregoing calculations and applying its professional judgment, Goldman Sachs applied enterprise value to LTM EBITDA multiples ranging from 6.0x to 7.0x to U.S. Grocery’s actual EBITDA for the last twelve-months ended December 28, 2013 to derive a range of illustrative enterprise values of U.S. Grocery. Adjusting for a Blackhawk tax liability of $335 million, where the estimated tax liability is calculated as the total tax liability due to the Blackhawk Distribution based on no tax basis step-up, assumptions provided by Safeway and the trading price of shares of Blackhawk Class A common stock on February 28, 2014, this resulted in illustrative values per share of Company common stock for U.S. Grocery, rounded to the nearest five cents, ranging from $28.05 to $33.90.

Illustrative Present Value of Future Share Price Analysis. Goldman Sachs performed an illustrative analysis of the implied present value of the future price per share of Company common stock, which is designed to provide an indication of the present value of a theoretical future value of a company’s equity as a function of such company’s estimated EBITDA and its assumed future enterprise value to EBITDA multiple, plus dividends. For this analysis, Goldman Sachs used certain financial information from the Projections for (i) Safeway Ex-Blackhawk and (ii) U.S. Grocery.

In calculating the implied present value of future share price per share of Company common stock for Safeway Ex-Blackhawk, Goldman Sachs first calculated the implied enterprise value of Safeway Ex-Blackhawk for each of the calendar years ending 2013 to 2015 by multiplying the estimated one-year forward EBITDA of Safeway Ex-Blackhawk by enterprise value to EBITDA multiples ranging from 4.7x to 5.8x. Goldman Sachs then subtracted the amount of total adjusted net debt for Safeway Ex-Blackhawk per the Projections for each of the respective calendar years ending 2013 to 2015 in order to calculate the implied equity values for calendar years ending 2013 to 2015, respectively. Goldman Sachs then divided these implied equity values by the respective calendar year end diluted outstanding shares of Company common stock, per the Projections, to calculate implied equity values per share of Company common stock for calendar years 2013 to 2015, respectively. Goldman Sachs then added the cumulative dividends per share of Company common stock payable to Safeway stockholders through the end of the respective projected calendar year. Goldman Sachs then discounted these implied total values per share of Company common stock back to December 31, 2013 using a discount rate of 9.1%, reflecting an estimate of the Safeway Ex-Blackhawk cost of equity. The range of discount rates was derived by application of the capital asset pricing model, which takes into account certain Safeway-specific metrics, including Safeway’s target capital structure and historical beta, as well as certain financial metrics for the U.S. financial markets generally. This analysis resulted in a range of implied present values, rounded to the nearest five cents, of $24.10 to $36.65 per share of Company common stock.

In calculating the implied present value of future share price per share of Company common stock for U.S. Grocery, Goldman Sachs first calculated the implied enterprise value of U.S. Grocery for each of the calendar years ending 2013 to 2015 by multiplying the estimated future EBITDA of U.S. Grocery by enterprise value to

 

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EBITDA multiples ranging from 4.7x to 5.8x. Goldman Sachs then subtracted the amount of total adjusted net debt for U.S. Grocery per the Projections for each of the respective calendar years ending 2013 to 2015 in order to calculate the implied equity values for calendar years ending 2013 to 2015, respectively. Goldman Sachs then divided these implied equity values by the respective calendar year end diluted outstanding shares of Company common stock, per the Projections, to calculate implied future equity values per share of Company common stock for calendar years 2013 to 2015, respectively. Goldman Sachs then added the cumulative dividends per share of Company common stock payable to Safeway stockholders through the end of the respective projected calendar year. Goldman Sachs then discounted these implied total values per share of Company common stock back to December 31, 2013 using a discount rate of 9.1%, reflecting an estimate of U.S. Grocery’s cost of equity. The range of discount rates was derived by application of the capital asset pricing model, which takes into account certain Safeway-specific metrics, including Safeway’s target capital structure and historical beta, as well as certain financial metrics for the U.S. financial markets generally. This analysis resulted in a range of implied present values, rounded to the nearest five cents, of $21.85 to $33.40 per share of Company common stock.

Illustrative Discounted Cash Flow Analysis. Goldman Sachs performed an illustrative discounted cash flow analysis to determine the present value per share of Company common stock of U.S. Grocery as of December 31, 2013. For purpose of this analysis, Goldman Sachs applied discount rates ranging from 7.5% to 8.5%, reflecting estimates of U.S. Grocery’s weighted average cost of capital, to (a) U.S. Grocery’s estimated unlevered free cash flow for the years 2014 through 2018, and (b) illustrative terminal values for U.S. Grocery in 2018. The range of discount rates was derived by application of the capital asset pricing model, which takes into account certain Safeway-specific metrics, including Safeway’s target capital structure, the cost of long-term debt, forecast tax rate and historical beta, as well as certain financial metrics for the U.S. financial markets generally. Goldman Sachs calculated U.S. Grocery’s estimated unlevered free cash flow as operating income, less income taxes, less capital expenditures, plus or minus changes in net working capital and plus or minus any non-cash adjustments as taken from the statement of cash flows included in the Projections. In addition, stock based compensation expense was treated as a cash expense for purposes of determining unlevered free cash flow. U.S. Grocery’s estimated unlevered free cash flow for the year 2014 also included an adjustment for the expected amount of cash taxes resulting from the Blackhawk Distribution. This analysis resulted in U.S. Grocery’s estimated unlevered free cash flow for the years ending 2014E through 2018E of $463 million, $770 million, $718 million, $759 million and $809 million, respectively. The illustrative terminal values were derived by applying perpetuity growth rates ranging from (1.0%) to 1.0% (which implied exit LTM EBITDA multiples ranging from 3.9x to 5.9x) to U.S. Grocery’s estimated unlevered free cash flow for 2018. The range of perpetuity growth rates was estimated by Goldman Sachs utilizing its professional judgment and experience. Goldman Sachs also cross-checked such estimates of perpetuity growth rates by reviewing the EBITDA multiples that were implied by such growth rates and a range of discount rates to be applied to U.S. Grocery’s future unlevered cash flow forecast. Goldman Sachs then added the net present values of the estimated unlevered free cash flow for the years 2014 through 2018 to the present value of the illustrative terminal value and subtracted total adjusted net debt for Safeway to derive a range of present values of U.S. Grocery equity value. By dividing this range of equity values by the total number of fully diluted outstanding shares of Company common stock, Goldman Sachs derived illustrative present values per share of Company common stock of U.S. Grocery as of December 31, 2013, rounded to the nearest five cents, ranging from $26.90 to $38.40.

Illustrative Leveraged Buyout Analysis. Goldman Sachs performed an illustrative leveraged buyout analysis to determine the range of prices per share of Company common stock a financial buyer may be willing to pay to purchase U.S. Grocery. For the purposes of this analysis, Goldman Sachs assumed an acquisition date of December 31, 2013, a target exit date of December 31, 2018, enterprise value to LTM EBITDA multiples ranging from 5.0x to 6.0x at exit, adjusted leverage as a multiple of LTM EBITDA as of December 31, 2013 of 6.0x and an internal rate of return to a financial buyer of 13% to 21%.

For purpose of this analysis, Goldman Sachs calculated U.S. Grocery’s free cash flow for debt service per the Projections as U.S. Grocery’s estimated net income, plus depreciation and amortization, minus estimated increases in net working capital, minus estimated capital expenditures, plus non-cash adjustments. Based upon U.S. Grocery’s

 

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estimated free cash flow for debt service as calculated and the assumptions described above, Goldman Sachs calculated illustrative purchase prices per share of Company common stock ranging from $27.00 to $29.00.

General

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to Safeway, Safeway Ex-Blackhawk, U.S. Grocery or the contemplated transaction.

Goldman Sachs prepared these analyses for purposes of Goldman Sachs’ providing its opinion to the Board as to the fairness from a financial point of view of the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be paid to the holders of shares of Company common stock pursuant to the Merger Agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Safeway, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

The consideration to be paid pursuant to the Merger Agreement was determined through arm’s-length negotiations between Safeway, on the one hand, and Cerberus and Ultimate Parent, on the other hand, and was approved by the Board. Goldman Sachs acted as financial advisor to the Board in connection with the transactions contemplated by the Merger Agreement. Goldman Sachs did not, however, recommend any specific amount of consideration to Safeway or the Board or that any specific amount of consideration constituted the only appropriate consideration for the transactions contemplated by the Merger Agreement.

As described above, Goldman Sachs’ opinion to the Board was one of many factors taken into consideration by the Board in making its determination to approve the Merger Agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion and the confirmatory letter of Goldman Sachs, respectively, attached to this Proxy Statement as Annex E.

Goldman Sachs and its affiliates are engaged in advisory, underwriting and financing, principal investing, sales and trading, research, investment management and other financial and non-financial activities and services for various persons and entities. Goldman Sachs and its affiliates and employees, and funds or other entities in which they invest or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of Safeway, Blackhawk, Ultimate Parent, any of their respective affiliates and third parties, including affiliates and portfolio companies of (i) Cerberus, a significant shareholder of Ultimate Parent, and (ii) Colony Financial, Inc. (“Colony”), Pritzker Organization, L.L.C. (“Pritzker”) or any other affiliate of a signatory to the Parent Entities’ equity commitment letters for the Merger (each, an “Equity Investor”), or any currency or commodity that may be involved in the transaction contemplated by the Merger Agreement for the accounts of Goldman Sachs and its affiliates and employees and their customers. Goldman Sachs acted as financial advisor to Safeway in connection with, and participated in certain of the negotiations leading to, the transactions contemplated by the Merger Agreement. Goldman Sachs has provided certain investment banking services to Safeway and its affiliates from time to time for which the Investment Banking Division of Goldman Sachs has received, and may receive, compensation, including having acted as financial advisor to Safeway with respect to the sale of its

 

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Canadian operations in June 2013. Goldman Sachs also has provided certain investment banking services to Blackhawk and its affiliates from time to time for which the Investment Banking Division of Goldman Sachs has received, and may receive, compensation, including having acted as joint book-running manager with respect to a public offering of 11,500,000 shares of Class A Common Stock of Blackhawk by Safeway and other selling shareholders in April 2013. Goldman Sachs also has provided certain investment banking services to Ultimate Parent and its affiliates from time to time, including having acted as financial advisor with respect to potential acquisitions by Albertson’s LLC of two publicly traded companies in May 2013 and as joint lead arranger and lender with respect to a term loan (aggregate principal amount of $300 million) provided to Albertson’s LLC in September 2013. Goldman Sachs also has provided certain investment banking services to Cerberus and its affiliates and portfolio companies from time to time for which the Investment Banking Division of Goldman Sachs has received, and may receive, compensation, including having acted as co-financial advisor with respect to the sale of GeoEye Inc., a former portfolio company of Cerberus, in July 2012, as co-lead underwriter with respect to an offering of 1.924% Debentures due 2019 (aggregate principal amount of €500 million) of BAWAG P.S.K., a portfolio company of Cerberus, in September 2012, as joint lead arranger and lender with respect to a term loan (aggregate principal amount of $500 million) provided to NewPage Corporation, a former portfolio company of Cerberus, in December 2012, as joint book-runner with respect to a public offering of 632,500,000 shares of common stock by Aozora Bank, Ltd., a portfolio company of Cerberus, in January 2013, as sole lender with respect to a mezzanine loan (aggregate principal amount of $750 million) and a floating rate mortgage loan (aggregate principal amount of $1 billion) to Kyo-Ya Hotels, a portfolio company of Cerberus, in January 2013, as joint lead arranger and lender with respect to a term loan (aggregate principal amount of $1.5 billion) provided to SUPERVALU Inc., a corporation into which Cerberus had agreed to make an investment, in March 2013, as joint lead arranger and lender with respect to a term loan (aggregate principal amount of $420 million) provided to Tower International, Inc. a portfolio company of Cerberus, in April 2013, as joint book-runner with respect to an offering of 6.750% Debentures due 2021 (aggregate principal amount of $400 million) of SUPERVALU Inc. in May 2013, as dealer manager with respect to a tender offer to purchase existing 8.0% Senior Notes due 2016 of SUPERVALU Inc. in June 2013, as joint book-runner with respect to a public offering of 7,888,122 shares of common stock by Tower International, Inc. in July 2013, as co-financial advisor with respect to the acquisition by Cerberus of the assets of Bankia Habitat S.L.U. in September 2013, as co-lead underwriter with respect to an offering of 8.125% Debentures due 2023 (aggregate principal amount of €300 million) of BAWAG P.S.K. in October 2013, and as joint lead book-runner and joint lead arranger with respect to the refinancing of an existing senior secured term loan agreement (aggregate principal amount of $1.5 billion) of SUPERVALU Inc. in January 2014. During the two-year period ended March 6, 2014, the Investment Banking Division of Goldman Sachs has received compensation for financial advisory and/or underwriting services provided directly to Cerberus and/or to its affiliates and portfolio companies (which may include companies that are not controlled by Cerberus) of approximately $124 million. Goldman Sachs also has provided certain investment banking services to Colony and its affiliates and portfolio companies from time to time for which the Investment Banking Division of Goldman Sachs has received, and may receive, compensation, including having acted as joint book-running manager with respect to an offering of 5.00% Convertible Senior Notes due 2023 (aggregate principal amount of $175 million) of Colony in April 2013. Goldman Sachs also has provided certain investment banking services to Pritzker and its affiliates and portfolio companies from time to time for which the Investment Banking Division of Goldman Sachs has received, and may receive, compensation, including having acted as joint booking-running manager with respect to an offering of 7.625% Senior Notes due 2021 (aggregate principal amount of $275 million) by TMS International Corp., a portfolio company of Pritzker, in October 2013, as joint lead arranger, joint book-runner and lender with respect to a term loan (aggregate principal amount of $475 million) provided to TMS International Corp. in October 2013, and as joint lead arranger, joint book-runner and lender with respect to a senior unsecured bridge loan facility (aggregate principal amount of $300 million) provided to Crystal Acquisition Company, Inc. and Crystal Merger Sub, Inc., each a portfolio company of Pritzker, in October 2013. Goldman Sachs may also in the future provide investment banking services to Safeway, Ultimate Parent, Blackhawk and their respective affiliates, including Cerberus, the Equity Investors and their respective affiliates and portfolio companies, for which the Investment Banking Division of Goldman Sachs may receive compensation. Affiliates of Goldman Sachs also may have co-invested with Cerberus, the Equity Investors and their respective affiliates from time to time and may have invested in limited partnership units of affiliates of Cerberus or the Equity Investors from time to time and may do so in the future.

 

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The Board selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the transactions contemplated by the Merger Agreement. Pursuant to a letter agreement dated February 27, 2014, Safeway engaged Goldman Sachs to act as its financial advisor in connection with the transactions contemplated by the Merger Agreement. Pursuant to the terms of this engagement letter, Safeway has agreed to pay Goldman Sachs a transaction fee of approximately $37.0 million, $2.0 million of which became payable upon execution of the Merger Agreement and the remainder of which is payable upon closing of the Merger. In addition, Safeway has agreed to reimburse Goldman Sachs for certain of its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws. Safeway has also agreed to pay Goldman Sachs a transaction fee of $5.0 million in connection with the Blackhawk Distribution, all of which is contingent upon the closing of the Blackhawk Distribution.

Opinion of Greenhill & Co., LLC, Financial Advisor to the Board

The Board retained Greenhill to act as one of its financial advisors in connection with the Board’s consideration of the proposed terms of the potential Merger. The Board selected Greenhill based on the recommendation of one of the independent directors and based on Greenhill’s qualifications, expertise, reputation and experience in mergers and acquisitions and financings. On March 6, 2014, at a meeting of the Board, Greenhill rendered to the Board an oral opinion, subsequently confirmed by delivery of a written opinion as of March 6, 2014, to the effect that, as of the date of the opinion, and based upon and subject to the limitations and assumptions set forth therein, the sum of (i) the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be received by the holders of shares of Company common stock pursuant to the Merger Agreement and (ii) the separate per share distribution to the holders of shares of Company common stock in the Blackhawk Distribution was fair, from a financial point of view, to such holders. On June 13, 2014, Greenhill delivered a letter to the Board confirming that, based upon and subject to the factors and assumptions stated therein, had Greenhill issued its opinion on March 6, 2014 on the basis of the transactions contemplated by the Merger Agreement, as amended by Amendment No. 1 and Amendment No. 2, the conclusion set forth in its opinion would not have changed. The confirmatory letter did not address, and Greenhill has not considered, any circumstances, developments or events occurring after March 6, 2014, other than the execution of Amendment No. 1 and Amendment No. 2, and its opinion is provided only as of such date. In connection with delivery of the confirmatory letter, the Board advised Greenhill, and with the Board’s permission, Greenhill assumed, that the changes to the Merger Agreement pursuant to Amendment No. 1 and Amendment No. 2 did not affect the Projections.

The full text of Greenhill’s written opinion, dated March 6, 2014, and confirmatory letter, dated June 13, 2014, which set forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion and the confirmatory letter, respectively, are attached to this Proxy Statement as Annex F and are incorporated herein by reference. The summary of Greenhill’s opinion is qualified in its entirety by reference to the full text of the opinion.

In arriving at its opinion, Greenhill, among other things:

 

    reviewed the draft of the Merger Agreement and ancillary agreements, dated March 6, 2014, and certain other related documents;

 

    reviewed certain publicly available financial statements of the Company;

 

    reviewed certain other publicly available business and financial information relating to the Company that Greenhill deemed relevant;

 

    reviewed certain information and other data, including financial forecasts, estimates and other financial and operating data concerning the Company, prepared by the management of the Company, in each case that the Board directed Greenhill to use for purposes of its analysis;

 

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    discussed the past and present operations and financial condition and the prospects of the Company with senior executives of the Company;

 

    reviewed the historical market prices and trading activity for shares of Company common stock and analyzed its implied valuation multiples;

 

    compared the value of the consideration with that received in certain publicly available transactions that Greenhill deemed relevant;

 

    compared the value of the consideration with the trading valuations of certain publicly traded companies that Greenhill deemed relevant;

 

    compared the value of the consideration to the valuation derived by discounting future cash flows and a terminal value of the business at discount rates Greenhill deemed appropriate;

 

    participated in discussions among representatives of the Company and its legal and financial advisors and representatives of the Parent Entities and their legal and financial advisors; and

 

    performed such other analyses and considered other such factors as Greenhill deemed appropriate.

Greenhill’s opinion was addressed to the Board as part of the Board’s consideration of the Merger. It was not intended to be and did not constitute a recommendation to the Board as to whether it should approve the Merger or the Merger Agreement, nor does it constitute a recommendation as to whether the stockholders of the Company should approve, adopt or take any other action with respect to the Merger at any meeting of the Company’s stockholders convened in connection with the Merger. Greenhill was not requested to opine as to, and its opinion did not in any manner address, the underlying business decision or whether to proceed with or effect the Merger. Greenhill has not expressed any opinion as to any aspect of the transactions contemplated by the Merger Agreement other than the fairness, from a financial point of view, to the holders of shares of Company common stock of the sum of (i) the Per Share Merger Consideration (excluding the Additional Cash Merger Consideration) to be received by the holders of the Company common stock pursuant to the Merger Agreement, and (ii) the separate per share distribution to the holders of shares of Company common stock in the Blackhawk Distribution. Greenhill expressed no opinion on, and did not address, any other term or aspect of the Merger Agreement, the Casa Ley CVR Agreement, the PDC CVR Agreement or the transactions contemplated by the Merger Agreement or any term or aspect of any other agreement or instrument contemplated by the Merger Agreement, the Casa Ley CVR Agreement or the PDC CVR Agreement or entered into or amended in connection with the transaction, including, the Blackhawk Distribution, the fairness of the transactions contemplated by the Merger Agreement to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors or other constituencies of Safeway. Greenhill expressed no opinion with respect to the amount or nature of any compensation to any officers, directors or employees of the Company, or any class of such persons relative to the consideration to be received by the holders of shares of Company common stock in the Merger or with respect to the fairness of any such compensation. In addition, Greenhill expressed no opinion as to the prices at which shares of the Blackhawk Class A common stock or the Blackhawk Class B common stock will trade following the closing of the Blackhawk Distribution or as to the impact of the transactions contemplated by the Merger Agreement on the solvency or viability of Safeway, Ultimate Parent or Blackhawk or the ability of Safeway, Ultimate Parent or Blackhawk to pay their respective obligations when they come due.

In conducting its review and analysis and rendering its opinion, Greenhill assumed and relied upon, without independent verification, the accuracy and completeness of the information publicly available, supplied or otherwise made available to it by representatives and management of the Company for the purposes of its opinion and further relied upon the assurances of the representatives and management of the Company that they were not aware of any facts or circumstances that would make such information inaccurate or misleading. With respect to the financial forecasts, estimates, projections and other data furnished or otherwise provided to Greenhill, Greenhill assumed, with the Board’s consent, that such forecasts, estimates, projections and data were reasonably prepared on a basis reflecting the best currently available estimates and good faith judgments of the management of the Company as to those matters, and we have relied upon such forecasts, estimates, projections

 

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and data to perform the analyses utilized in arriving at Greenhill’s opinion. Greenhill expressed no opinion with respect to such forecasts, estimates, projections and data or the assumptions upon which they are based.

Greenhill was not requested to and did not provide advice concerning the structure, the specific amount of consideration, or any other aspects of the Merger, or to provide services other than the delivery of its opinion. Greenhill was not requested to and did not solicit any expressions of interest from any other parties with respect to the Merger or any other alternative transactions. Greenhill did not participate in the negotiations with respect to the terms of the Merger. No opinion was expressed as to whether any alternative transaction might produce consideration for the Company in an amount in excess of that contemplated in the Merger.

Greenhill acted as financial advisor to the Board in connection with the Merger and received total fees of $2.4 million for delivery of its opinion and confirmatory letter, which was not contingent upon closing of the Merger. Greenhill will also be reimbursed for its reasonable expenses incurred in connection with performing its services. In addition, the Company has agreed to indemnify Greenhill for certain liabilities and expenses that may arise out of Greenhill’s engagement. Greenhill’s opinion was approved by its fairness committee. During the two years preceding the date of its opinion, Greenhill was not engaged by, did not perform any services for or receive any compensation from, the Company or any other parties to the Merger Agreement other than (i) the amounts described above and (ii) services performed from December 2011 to October 2013 for Cerberus Real Estate Capital Management, LLC in connection with the formation and capitalization of Cerberus Institutional Real Estate Partners III, L.P. (a $1.426 billion fund), for which Cerberus Real Estate Capital Management, LLC agreed to pay approximately $16.5 million in placement fees and to reimburse certain of Greenhill’s out-of-pocket expenses. In addition, Greenhill performed services for SUPERVALU INC. in connection with the sale of its subsidiary, NAI, to an investor group led by Cerberus, for which SUPERVALU INC. paid Greenhill a transaction fee and reimbursed certain of Greenhill’s out-of-pocket expenses.

Greenhill did not make any independent valuation or appraisal of the assets or liabilities (contingent or otherwise) of the Company, nor was it furnished with any such valuations or appraisals. Greenhill assumed for purposes of its opinion that the Merger will be consummated in accordance with the terms set forth in the draft form of the Merger Agreement reviewed by Greenhill, and without waiver or amendment of any material terms or conditions set forth in the Merger Agreement. Greenhill further assumed that all material governmental, regulatory and other consents and approvals necessary for the closing of the Merger will be obtained without any effect on the Company or the Merger meaningful to its analysis. Greenhill’s opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to it as of, March 4, 2014. It should be understood that subsequent developments may affect its opinion, and Greenhill does not have any obligation to update, revise, or reaffirm its opinion.

Summary of Greenhill’s Financial Analyses

The following is a summary of the material financial analyses presented by Greenhill to the Board in connection with rendering its opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Greenhill, nor does the order of the analyses described represent the relative importance or weight given to those analyses by Greenhill. Some of the summaries of the financial analyses include information presented in tabular format. In order to fully understand the financial analyses performed by Greenhill, the tables must be read together with the full text of each summary and are not alone a complete description of Greenhill’s financial analyses. Considering the data set forth in the tables below without considering the narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Greenhill’s financial analyses. Except as noted otherwise, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before March 4, 2014, and is not necessarily indicative of current market conditions.

 

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Greenhill’s analysis consists of four parts: the Company’s U.S. Grocery business, its interest in Blackhawk, the Casa Ley CVR and the PDC CVR. Greenhill separately analyzed the U.S. Grocery business of the Company due to the size of the operations of the U.S. Grocery business relative to the size of the operations of the whole Company, and in order to better compare the core operations of the Company to the operations of comparable publicly traded companies and target companies involved in selected business combinations. Greenhill included the interest in Blackhawk in its analysis because the trading value of Safeway common stock includes the value of Safeway’s interest in Blackhawk. Greenhill performed a selected comparable company analysis, a discounted cash flow analysis, a precedent transaction analysis and a leveraged buyout analysis with respect to the Company’s U.S. Grocery business. Greenhill also separately analyzed each of Blackhawk’s valuation, the Casa Ley CVR and the PDC CVR and combined these analyses together with the U.S. Grocery analysis in order to determine the applicable ranges of potential values. Greenhill also performed a historical premiums analysis and reviewed historical trading prices for the shares of the Company common stock.

Selected Comparable Company Analysis

Greenhill performed a comparable company analysis of the U.S. Grocery operations of the Company, based on factors such as then-current market values, capital structure and operating statistics of other publicly traded companies believed to be generally relevant, in order to derive trading multiples for these companies, which could then be applied to operating statistics of the U.S. Grocery operations of the Company to derive an implied per share equity value range for the U.S. Grocery operations of the Company.

In this analysis, Greenhill reviewed, to the extent publicly available, selected financial data for the publicly traded companies set forth below (together, the “Greenhill peer group”).

 

    

Enterprise Value / 2014 EBITDA

  

Price / 2014 Earnings

Kroger Co.

   6.3x    13.9x

Koninklijke Ahold N.V.

   5.5x    14.6x

Delhaize Group SA

   5.1x    12.1x

SUPERVALU INC.

   6.0x    10.9x

Ingles Markets, Incorporated

   6.8x    N/A

Spartan Stores, Inc.

   9.4x    25.6x

Roundy’s, Inc.

   5.8x    16.9x

Mean

   6.4x    15.6x

Median

   6.0x    14.2x

Greenhill examined these companies because they are publicly traded companies in the retail grocery business with comparable operations to those of the U.S. Grocery business of the Company. Greenhill chose to use estimated 2014 EBITDA and earnings rather than actual 2013 results because current market valuations are typically a reflection of expected future earnings rather than past performance.

Greenhill calculated and compared various financial multiples and ratios based on information it obtained from filings with the SEC, Capital IQ, FactSet, IBES, and other publicly available information as of March 4, 2014. The multiples for each of the selected companies were based on closing share prices on March 4, 2014 and the most recent filings with the SEC and Capital IQ, FactSet and IBES estimates. Greenhill derived ranges of multiples deemed most meaningful for its analysis, based on its experience valuing companies in the retail and grocery sectors, and applied such ranges of multiples to the corresponding projections for the Company’s U.S. Grocery operations included in the February Projections (as defined under “—Prospective Financial Information”). Based on these analyses, Greenhill applied ranges of 12.0x to 14.0x estimated 2014 earnings, to arrive at an implied equity value per share of Company common stock of $12.95 to $15.09 for the Company’s U.S. Grocery operations, and applied ranges of 5.25x to 6.25x estimated 2014 EBITDA to arrive at an implied equity value per share of Company common stock of $26.50 to $32.52 for the Company’s U.S. Grocery operations. Adding in the Blackhawk valuation and the Casa Ley CVR and PDC CVR valuations described

 

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below, the ranges were $19.45 to $23.42 inclusive of those valuations based on estimated 2014 earnings and $32.99 to $40.86 inclusive of those valuations based on estimated 2014 EBITDA.

Discounted Cash Flow Analysis

Greenhill performed an illustrative discounted cash flow analysis of the Company’s U.S. Grocery operations on a standalone basis to determine indications of implied equity values per share of Company common stock for the Company’s U.S. Grocery operations using financial forecasts and projections prepared by the Company’s management and provided to Greenhill, for 2014 to 2018. Greenhill calculated an implied present value per share of Company common stock for the Company’s U.S. Grocery operations by discounting to present value as of March 5, 2014 (a) estimates of the standalone, after-tax unlevered free cash flow for the period following March 5, 2014 through the remainder of 2014 and for each of the years 2015 to 2018 calculated by Greenhill from the February Projections and (b) ranges of terminal values for the Company as of December 31, 2018 derived by applying a range of terminal EBITDA multiples between 5.0x-6.0x to the estimate of 2018 EBITDA. Greenhill calculated standalone, after-tax unlevered free cash flow for such 2014 period and for each of the years 2015 to 2018 starting with cash flow from U.S. Grocery operations, adjusted for stock based compensation, interest expense, incremental rent expense and other non-cash adjustments, in each case adjusted for the effects of income taxes, less capital expenditures and other net cash flows from investing. This analysis resulted in U.S. Grocery’s estimated unlevered free cash flow for such 2014 period of $675 million and for the years ending 2015 through 2018 of $759 million, $707 million, $757 million and $811 million, respectively. The standalone, after-tax unlevered free cash flow for each of these periods and terminal values were then discounted to calculate an indication of present values using discount rates ranging from 7% to 9% based on an analysis of the Greenhill peer group’s weighted average cost of capital. In order to derive the discount rates ranging from 7% to 9%, Greenhill used levered betas provided by Bloomberg for comparable companies to the Company’s U.S. Grocery operations, as well as capital structure information about each company, to calculate an appropriate range for the unlevered betas for the Company’s U.S. Grocery operations. Greenhill then used this range of unlevered betas and several other inputs, including (i) a target debt-to-equity ratio consistent with the comparable companies, (ii) a risk free rate equal to the yield-to-maturity of a long-dated U.S. Treasury Bond, (iii) an expected market return for U.S. markets provided by Ibbotson Associates, a standard industry provider of this information, (iv) a cost of debt consistent with public yields of comparable companies with capital structures in line with the selected target debt-to-equity ratio for the Company’s U.S. Grocery operations and (v) the U.S. Grocery tax rate from the prospective financial information provided by the Company’s management, to (A) calculate a range of levered betas for the Company’s U.S. Grocery operations and then (B) use the capital asset pricing model to calculate a range of weighted average cost of capital discount rates for the Company’s U.S. Grocery operations. Greenhill’s analysis also assumed the Company’s net debt balance of $1,337 million. In addition, Greenhill’s analysis assumed a fully diluted share count of 236 million shares, based on common shares outstanding of 232 million, plus the dilutive effects of restricted stock awards and stock options using the treasury stock method. This analysis resulted in an implied per share equity value range for the Company’s U.S. Grocery operations of $31.97 to $40.14 per share of Company common stock. Adding in the Blackhawk valuation and the Casa Ley CVR and PDC CVR valuations described below, the range was $38.46 to $48.48 per share of Company common stock. Greenhill’s analysis used tax rates and assumptions in each forecast year as provided by the Company.

 

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Precedent Transaction Analysis

Greenhill performed an analysis of selected business combinations consisting of transactions that Greenhill, based on its experience with merger and acquisition transactions, deemed relevant. Greenhill’s analysis was based on publicly available information regarding such transactions and the Capital IQ and FactSet databases. The selected transactions were not intended to be representative of the entire range of possible transactions in the grocery industry. Greenhill chose the following five transactions, all of which had transaction values greater than $350 million and were announced within the last three years, based on the professional judgment and experience of its investment bankers, taking into account the comparability, in terms of size, markets and operations, of the acquired businesses to the U.S. Grocery operations of the Company.

 

Announced
Date

  

Target

  

Acquiror

   Transaction
Value ($mm)
     Implied
TV/EBITDA

12/20/2013

   Arden Group Inc.    TPG Capital, L.P.    $ 390       9.9x

07/22/2013

   Nash Finch Co.    Spartan Stores, Inc.      776       6.9x

07/09/2013

   Harris Teeter Supermarkets, Inc.    Kroger Co.      2,658       6.7x

06/12/2013

   Canada Safeway Ltd.    Sobeys Inc.      5,690       10.7x

12/19/2011

   Winn-Dixie Stores, Inc.    BI-LO LLC      642       4.3x

Median

            6.9x

Greenhill reviewed the consideration paid in the selected transactions in terms of the implied enterprise value of such transactions as a multiple of the target’s EBITDA for the last twelve month period that was most recently reported prior to the announcement of the applicable transaction. In conducting this review and deriving a range of multiples deemed most relevant for its analysis, Greenhill evaluated the respective comparability of these acquired businesses to the U.S. Grocery operations of the Company. Based on the comparability of the target to the U.S. Grocery operations of the Company across various factors, as judged relevant by Greenhill, and based on its experience valuing companies in the retail and grocery sectors, Greenhill deemed the acquisitions of (i) Harris Teeter Supermarkets, Inc. by Kroger Co., (ii) Nash Finch Co. by Spartan Stores, Inc. and (iii) Winn-Dixie Stores, Inc. by BI-LO LLC to be the most applicable to the potential merger and therefore to the EV/EBITDA multiple used in Greenhill’s analysis.

On this basis, Greenhill arrived at ranges of implied enterprise values for the U.S. Grocery operations of the Company. Greenhill then subtracted net debt to arrive at the implied equity value of the Company’s U.S. Grocery operations. The results of this analysis are summarized below.

 

    

Low
2013

    

High
2013

EBITDA of U.S. Grocery Operations

   $1,378mm      $1,378mm

EV / EBITDA Multiple

   6.0x      7.0x

Total Implied Enterprise Value of U.S. Grocery Operations

   $8,268 mm      $9,646 mm

Less: Net Debt

   $(1,337) mm      $(1,337) mm

Implied Equity Value of U.S. Grocery Operations

   $6,931 mm      $8,309 mm

Fully Diluted Shares Outstanding

   236 mm      236 mm

Implied Value per Share of U.S. Grocery Operations

   $29.39      $35.14

Adding in the Blackhawk valuation and the Casa Ley CVR and PDC CVR valuations described below, the range was $35.88 to $43.48 per share of Company common stock.

Leveraged Buyout Analysis

Greenhill performed an illustrative leveraged buyout analysis to determine the prices at which a financial buyer might effect a leveraged buyout of the Company using a capital structure similar to that proposed for the Merger. In performing this analysis, Greenhill made several assumptions about the characteristics of such a transaction based on precedent transactions analyses, including such factors as transaction leverage, fees and

 

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expenses, financing terms and exit EBITDA multiples. Starting with the February Projections, Greenhill calculated U.S. Grocery’s free cash flow for debt service as U.S. Grocery’s estimated net income less additional tax-effected interest expense, plus depreciation and amortization, minus estimated increases in net working capital, minus net cash from investment activities, plus other non-cash adjustments. Greenhill assumed that a financial buyer would value the U.S. Grocery operations of the Company in 2018 at an aggregate value range that represented exit multiples of estimated 2018 EBITDA ranging from 5.0x to 6.0x. Greenhill also assumed, based on its experience, that financial buyers would likely target internal rates of return ranging from 15% to 25%. As a result of this analysis, Greenhill derived estimated implied values per share of Company common stock that a financial buyer might be willing to pay to acquire the U.S. Grocery operations of the Company ranging from $24.89 to $32.61. Adding in the Blackhawk valuation and the Casa Ley CVR and PDC CVR valuations described below, the range was $31.39 to $40.94.

Blackhawk Valuation

Greenhill performed an analysis to estimate the value to the Company’s stockholders of the Company’s 72% ownership in Blackhawk. Greenhill reviewed the publicly available share price of Blackhawk Class A common stock as of March 4, 2014 and the number of shares outstanding to calculate the equity value of Blackhawk. Greenhill then used the percentage stake of Blackhawk owned by the Company to calculate the value of the stake on a per share basis of Company common stock. Greenhill also considered a potential increase in value to the holders of shares of Company common stock of the value of a step-up in tax basis resulting from the Blackhawk Distribution to the holders of shares of Company common stock. The tax benefit was calculated using the then current Company tax basis in the assets of Blackhawk of $95 million, as provided by the management of the Company, an assumed amortization period of fifteen years, an estimated weighted average cost of capital of 10.1% for Blackhawk and a tax rate of 39%. In order to derive the 10.1% discount rate, Greenhill used the levered beta for Blackhawk provided by Bloomberg, as well as the most recent capital structure information for Blackhawk from Blackhawk’s public filings. Greenhill then used this information, along with a risk free rate equal to the yield-to-maturity of a long-dated U.S. Treasury Bond, an expected market return for U.S. markets provided by Ibbotson Associates and a cost of debt and tax rate for Blackhawk as provided by Bloomberg, to derive a weighted average cost of capital for Blackhawk using the capital asset pricing model. As a result of this analysis, Greenhill calculated the estimated value of the Company’s ownership of Blackhawk to be $3.94 per share of Company common stock and the value of the potential step up in basis to potentially result in up to $0.76 in additional value per share of Company common stock for a potential total of $4.70 per share of Company common stock.

Greenhill calculated the value of the step-up in tax basis of Blackhawk shares as follows: Greenhill’s analysis assumed a current tax basis in Blackhawk’s shares, as estimated by the Company’s management. Greenhill then calculated the current market value of Blackhawk’s equity, based on the publicly disclosed shares outstanding and the share price on the valuation date. The step-up in basis was calculated as the difference between this market value and the basis. The step-up was assumed to be amortized over 15 years. Greenhill calculated the present value of the tax benefit created by this 15-year amortization, assuming the Blackhawk tax rate estimated by the Company’s management and using the weighted-average cost of capital calculated by Greenhill and Bloomberg as described above. Greenhill then calculated the Company’s interest in the present value of the step-up, by multiplying the step-up by the Company’s 72% ownership of Blackhawk’s equity, and divided this number by the 235 million diluted shares of Company common stock outstanding to arrive at a benefit of $0.76 per share of Company common stock.

CVR Analysis

Greenhill performed an analysis to calculate the value of the Casa Ley CVR. The valuation was calculated based on the estimated present value of the Company’s ownership stake in Casa Ley based on the possibilities of an immediate sale or a sale of the ownership stake in four years, pursuant to the Casa Ley CVR Agreement. Greenhill calculated a range of implied present values of the Casa Ley Interest by discounting to the present as of March 5,

 

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2014 (a) the EBITDA from the Casa Ley Interest for each of the years from 2014 through 2018, calculated by Greenhill from the February Projections and (b) terminal values for the Casa Ley Interest as of March 5, 2018, derived by applying a perpetuity growth rate of 2.0%, which represents an assumed rate of growth for the steady-state operations of the business into perpetuity, to the estimates of the EBITDA of the Casa Ley Interest. Greenhill’s analysis used the net present value of the EBITDA of Casa Ley, net of taxes at 39.25%, discounted at a discount rate of 9.6%, to determine the value attributable to the Casa Ley Interest in the event of an immediate sale. Greenhill used levered betas provided by Bloomberg for comparable companies to Casa Ley, as well as capital structure information about each company to calculate an unlevered beta for Casa Ley. Greenhill then used this unlevered beta and several other inputs, including (i) a risk free rate equal to the yield-to-maturity of a long-dated Mexican government bond and an expected market return for Mexican markets provided by Bloomberg and (ii) Casa Ley’s statutory tax rate as provided by Bloomberg to (A) calculate a range of levered betas for Casa Ley and then (B) use the capital asset pricing model to calculate a range of costs of equity for Casa Ley. In order to determine the present value of the Casa Ley CVR in the event of a sale in four years of the Casa Ley Interest, Greenhill applied the same present value analysis, excluding the EBITDA of Casa Ley from March 4, 2014 to March 4, 2018, to arrive at the present value on March 4, 2014 of the potential sale of Casa Ley on March 4, 2018.

Greenhill performed an analysis to calculate the value of the PDC CVR. This valuation was calculated based upon the estimated stabilized net operating income of PDC provided to Greenhill by the Company. Greenhill used the stabilized net operating income at PDC and, using multiples based on capitalization rates ranging from 6.5% to 7.4%, produced a range of gross values for PDC. Adjustments to the gross values were made for estimated costs of $564.9 million to complete construction projects and sales of the PDC assets and taxes at a rate of 39% (using a tax basis for the Company of $435 million, as provided by the management of the Company). Greenhill also considered the possibility that the non-sale of PDC assets before the sale deadline in the PDC CVR Agreement would result in a reduction of the value of the assets.

Greenhill’s analysis resulted in an estimated aggregate value of the Casa Ley CVR and the PDC CVR to be between $2.56 and $3.64 per share of Company common stock.

Historical Premiums Analysis

Greenhill reviewed available data from 129 U.S. public company transactions announced in the past five years with transaction values between $500 million and $10 billion. Specifically, Greenhill analyzed the acquisition price per share as a percentage premium to the closing share price one day, one week and one month prior to the announcement of the transaction. Greenhill also applied the same criteria to those of the 129 transactions involving a company involved in the retail sector. In transactions falling into the broad group, the median one-day, one-week and one-month premiums were 21.9%, 20.9% and 24.8%, respectively and such 75th quartile values were 31.5%, 35.7% and 38.8%, respectively. In transactions in the retail industry, the median one-day, one-week and one-month premiums were 19.7%, 17.9% and 22.6%, respectively and such 75th quartile values were 35.0%, 37.2% and 39.2%, respectively. Based on these values, Greenhill derived a reference range of 25% to 35% for a premium to the price of $28.24 (the closing price on September 16, 2013, which is the last date prior to the day JANA Partners filed a Schedule 13D reporting a 6.2% ownership stake in the Company, the “unaffected date”). This analysis resulted in an implied per share equity value range for the Company common stock of $35.30 to $38.12.

Historical Share Price Analysis

Greenhill reviewed the historical trading range for the Company common stock for two separate time periods: (1) the 52 weeks up to (and including) the unaffected date of September 16, 2013, and (2) the period from September 17, 2013 through the date of the analysis, March 4, 2014. The range between the intraday low and intraday high for Company common stock over the 52-week period was $22.26 to $28.88 per share. The range between the intraday low and intraday high for Company common stock from September 17, 2013 to March 4, 2014 was $28.01 to $38.73.

 

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General

The summary set forth above does not purport to be a complete description of the analyses or data presented by Greenhill, but simply describes, in summary form, the material analyses that Greenhill considered in connection with its opinion. The preparation of an opinion regarding fairness, from a financial point of view, is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances, and, therefore, such an opinion is not readily susceptible to partial analysis or summary description. The preparation of an opinion regarding fairness, from a financial point of view, does not involve a mathematical evaluation or weighing of the results of the individual analyses performed, but requires Greenhill to exercise its professional judgment, based on its experience, in considering a wide variety of analyses taken as a whole. Each of the analyses conducted by Greenhill was carried out in order to provide a different perspective on the financial terms of the Merger and add to the total mix of information available. Greenhill did not form a conclusion as to whether any individual analysis, considered in isolation, supported or failed to support an opinion about the fairness of the consideration to be paid to the holders of shares of Company common stock pursuant to the Merger Agreement. Rather, in reaching its conclusion, Greenhill considered the results of the analyses in light of each other and without placing particular reliance or weight on any particular analysis, and concluded that its analyses, taken as a whole, supported its determination. Accordingly, notwithstanding the separate factors summarized above, Greenhill believes that its analyses must be considered as a whole and selecting portions of its analyses and the factors considered by it, without considering all analyses and factors, may create an incomplete view of the evaluation process underlying its opinion. In performing its analyses, Greenhill made numerous assumptions with respect to industry performance, business and economic conditions and other matters. The analyses performed by Greenhill are not necessarily indicative of future actual values or results, which may be significantly more or less favorable than suggested by such analyses. The analyses do not purport to be appraisals or to reflect the prices at which the Company might actually be sold.

Greenhill’s opinion was one of the many factors considered by the Board in the evaluation of the Merger and should not be viewed as determinative of the views of the Board with respect to the Merger.

Prospective Financial Information

In connection with Albertson’s LLC’s consideration of a possible transaction with Safeway, in January 2014, the Company made available to Albertson’s LLC and certain of their affiliates, as well as Goldman Sachs, in its capacity as financial advisor to the Board, certain prospective financial information concerning the Company, including projected revenues, EBITDA, net income and free cash flow (the “January Projections”). In connection with the respective financial analyses performed by Goldman Sachs and Greenhill, each in their capacities as financial advisors to the Board, in February 2014, the Company provided Goldman Sachs and Greenhill certain updated prospective financial information concerning the Company, including projected revenues, EBITDA, net income and free cash flow, which reflected certain changes from the January Projections based on actual 2013 results and the terms then contemplated with respect to a transaction with Albertson’s LLC, as well as adjustments to reflect certain non-operational changes to the January Projections (the “February Projections” and, together with the January Projections, the “Projections”).

The Company’s management does not in the ordinary course of business prepare prospective financial information for multiple upcoming fiscal years but made available the Projections for use by the Parent Entities to assist them with their due diligence review of the Company and for use by Goldman Sachs and Greenhill in connection with the financial analyses performed by each of them in connection with delivering their respective written financial opinions to the Board.

The Projections do not take into account any circumstances or events occurring after the date they were prepared, including the transactions contemplated by the Merger Agreement, including the Merger. Further, the Projections do not take into account the effect of any failure of the Merger to occur and should not be viewed as accurate or continuing in that context.

 

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The Projections reflect numerous estimates and assumptions made by the Company with respect to industry performance, general business, economic, regulatory, market and financial conditions and other future events, as well as matters specific to the Company’s business, all of which are difficult to predict and many of which are beyond the Company’s control. The Projections reflect subjective judgment in many respects and thus are susceptible to multiple interpretations and periodic revisions based on actual experience and business developments. As such, the Projections constitute forward-looking information and are subject to risks and uncertainties that could cause actual results to differ materially from the results forecasted in the Projections, including, but not limited to, the Company’s performance, industry performance, general business and economic conditions, customer requirements, competition, adverse changes in applicable laws, regulations or rules, and the various risks set forth in the Company’s reports filed with the SEC. There can be no assurance that the Projections will be realized or that actual results will not be significantly higher or lower than forecast. The Projections cover multiple years and such information by its nature becomes less reliable with each successive year. In addition, the Projections will be affected by the Company’s ability to achieve strategic goals, objectives and targets over the applicable periods. The assumptions upon which the Projections were based necessarily involve judgments with respect to, among other things, future economic, competitive and regulatory conditions and financial market conditions, all of which are difficult or impossible to predict accurately and many of which are beyond the Company’s control. The Projections reflect assumptions as to certain business decisions that are subject to change. The Projections cannot, therefore, be considered a guarantee of future operating results, and this information should not be relied on as such. The inclusion of the Projections should not be regarded as an indication that the Company, the Parent Entities, the Board, any of their respective financial advisors or anyone who received this information then considered, or now considers, them a reliable prediction of future events, and this information should not be relied upon as such. None of the Company, the Parent Entities, the Board or any of their financial advisors or any of their affiliates intend to, and each of them disclaims any obligation to, update, revise or correct the Projections if they are or become inaccurate.

The January Projections, which the Company made available to the Parent Entities and certain of their affiliates in January 2014, were estimated based on, among other things, the Company’s then current estimates of the Company’s balance sheet, income statement and statement of cash flows for the fiscal year ended December 28, 2013.

The February Projections, which the Company made available to the Financial Advisors in February 2014, were estimated based on, among other things, the Company’s actual balance sheet, income statement and statement of cash flows for the fiscal year ended December 28, 2013, as reported by the Company in its Annual Report on Form 10-K, filed with the SEC on February 26, 2014. In addition, the February Projections were updated to reflect that certain terms of the transaction proposed by Albertsons had changed since the December Proposal, including the introduction of the Casa Ley CVR and the PDC CVR. Additionally, the February Projections were, at Goldman Sachs’ request, modified to reflect certain non-operational changes to the January Projections, including by removing interest income and equity incentive compensation expense from the calculation of EBITDA. Finally, Goldman Sachs and Greenhill revised the February Projections, as directed by the Company, to adjust EBITDA for U.S. Grocery for the value of the rent expense payable by the Company to PDC pursuant to the PDC Leases and to adjust net income for U.S. Grocery for the after-tax value of the rent expense payable by the Company to PDC pursuant to the PDC Leases.

The summary of such information below is included solely to give stockholders access to the information that was made available and is not included in this Proxy Statement in order to influence any stockholder to make any investment decision with respect to the Merger, including whether or not to seek appraisal rights with respect to the shares of Company common stock.

The inclusion of the summary of the Projections herein should not be deemed an admission or representation by the Company, the Parent Entities or the Board that they are viewed by the Company, the Parent Entities or the Board as material information of the Company, and, in fact, the Company, the Parent Entities and the Board view the Projections as non-material because of the inherent risks and uncertainties associated with

 

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such long range forecasts. The Projections should be evaluated, if at all, in conjunction with the historical financial statements and other information regarding the Company contained in the Company’s public filings with the SEC. In light of the foregoing factors and the uncertainties inherent in the Projections, stockholders are cautioned not to place undue, if any, reliance on the Projections.

Neither the Company’s independent auditors, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the Projections.

Certain information set forth in the Projections are non-GAAP financial measures. These non-GAAP financial measures are not calculated in accordance with, or a substitute for financial measures calculated in accordance with, GAAP and may be different from non-GAAP financial measures used by other companies. Furthermore, there are limitations inherent in non-GAAP financial measures, in that they exclude a variety of charges and credits that are required to be included in a GAAP presentation. Accordingly, these non-GAAP financial measures should be considered together with, and not as an alternative to, GAAP basis financial measures.

Summary of the Projections

January Projections

 

(dollars in millions)  
     Fiscal Year(1)  
     2013E     2014E      2015E     2016E      2017E      2018E  

Safeway WholeCo(2)

               

Revenue

   $ 36,059 (7)    $ 38,093       $ 38,950      $ 40,569       $ 42,303       $ 44,172   

EBITDA(3)

   $ 1,695 (7)    $ 1,710       $ 1,797      $ 1,904       $ 2,010       $ 2,119   

Net Income

   $ 3,311 (8)    $ 340       $ 408      $ 489       $ 577       $ 672   

Depreciation and Amortization Expense

   $ 964      $ 935       $ 923      $ 912       $ 902       $ 891   

Income Tax Expense

   $ 144      $ 200       $ 240      $ 287       $ 339       $ 393   

Stock-based Compensation and Other Non-Cash Expense

   $ 56      $ 56       $ 56      $ 56       $ 56       $ 56   

Free Cash Flow(4)

   $ 4,821 (8)    $ 672       $ 693      $ 842       $ 865       $ 951   

Capital Expenditures

   $ 850      $ 850       $ 850      $ 900       $ 900       $ 900   

Changes in Working Capital

   $ 147      $ 33       $ (27   $ 45       $ 47       $ 51   

Safeway Ex-Blackhawk(5)

               

EBITDA(3)

   $ 1,596 (7)    $ 1,593       $ 1,662      $ 1,752       $ 1,843       $ 1,940   

U.S. Grocery(6)

               

EBITDA(3)

   $ 1,538 (7)    $ 1,553       $ 1,600      $ 1,685       $ 1,776       $ 1,873   

 

(1) FY 2014E based on a 53-week year. FY 2013 and FY 2015E to FY 2018E based on a 52-week year.
(2) Safeway WholeCo includes U.S. Grocery, Casa Ley, PDC and Blackhawk and excludes Dominick’s Finer Foods and Safeway’s Canadian business.
(3) EBITDA is generally calculated by adjusting net income to add back certain expenses and charges relating to interest, taxes, depreciation, equity incentive compensation and impairments for property and notes receivable, as well as to adjust the income/charge from “LIFO” accounting and non-controlling interests. EBITDA excludes earnings from Casa Ley and for Safeway WholeCo and Safeway Ex-Blackhawk assumes Safeway would not receive any dividends in respect of the Casa Ley Interest.
(4) Free Cash Flow is calculated as cash flow from operations less cash flow from investing activities (excluding any acquisitions).

 

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(5) Safeway Ex-Blackhawk includes U.S. Grocery, Casa Ley and PDC but excludes Blackhawk, Dominick’s Finer Foods and Safeway’s Canadian business.
(6) U.S. Grocery excludes Casa Ley, PDC, Blackhawk, Dominick’s Finer Foods and Safeway’s Canadian business.
(7) Amounts normalized to exclude immaterial one-time items.
(8) Includes $3,047 in Net Income and $4,171 in Free Cash Flow relating to the Company’s disposition of its Canadian business.

February Projections

 

(dollars in millions)  
     Fiscal Year(1)  
     2013A     2014E      2015E      2016E      2017E      2018E  

Safeway WholeCo(2)

                

Revenue

   $ 36,139 (7)    $ 37,934       $ 38,788       $ 40,402       $ 42,129       $ 43,992   

EBITDA(3)

   $ 1,597 (7)    $ 1,653       $ 1,767       $ 1,881       $ 1,990       $ 2,100   

Net Income

   $ 232 (7)    $ 344       $ 434       $ 519       $ 608       $ 704   

Depreciation and Amortization Expense

   $ 943      $ 921       $ 904       $ 889       $ 874       $ 861   

Free Cash Flow(4)

   $ 602 (7)    $ 650       $ 694       $ 662       $ 726       $ 803   

Capital Expenditures

   $ 767      $ 850       $ 850       $ 900       $ 900       $ 900   

Changes in Working Capital

   $ 101      $ 50       $ 74       $ 12       $ 12       $ 12   

Safeway Ex-Blackhawk(5)

                

Revenue

   $ 35,007 (7)    $ 36,534       $ 37,108       $ 38,386       $ 39,710       $ 41,089   

EBITDA(3)

   $ 1,483 (7)    $ 1,531       $ 1,626       $ 1,724       $ 1,817       $ 1,916   

Net Income

   $ 180 (7)    $ 304       $ 385       $ 463       $ 546       $ 636   

Depreciation and Amortization Expense

   $ 913      $ 891       $ 874       $ 859       $ 844       $ 831   

Capital Expenditures

   $ 739      $ 825       $ 825       $ 875       $ 875       $ 875   

Changes in Working Capital

   $ 101      $ 50       $ 74       $ 12       $ 12       $ 12   

U.S. Grocery(6)

                

Revenue

   $ 35,007 (7)    $ 36,534       $ 37,108       $ 38,386       $ 39,710       $ 41,089   

EBITDA(3)

   $ 1,394 (7)    $ 1,443       $ 1,509       $ 1,595       $ 1,682       $ 1,774   

Net Income(8)

   $ 129 (7)    $ 252       $ 316       $ 388       $ 469       $ 556   

Depreciation and Amortization Expense

   $ 902      $ 880       $ 861       $ 843       $ 826       $ 809   

Income Tax Expense

   $ 90      $ 141       $ 175       $ 214       $ 258       $ 305   

Stock-based Compensation and Other Non-Cash Expense

   $ 59      $ 48       $ 48       $ 48       $ 48       $ 48   

Free Cash Flow

     —   (9)    $ 733       $ 753       $ 710       $ 768       $ 839   

Capital Expenditures

   $ 632      $ 675       $ 675       $ 725       $ 725       $ 725   

Changes in Working Capital

   $ 101      $ 50       $ 74       $ 12       $ 12       $ 12   

 

(1) FY 2014E based on a 53-week year. FY 2013A and FY 2015E to FY 2018E based on a 52-week year.
(2) Safeway WholeCo includes U.S. Grocery, Casa Ley, PDC and Blackhawk and excludes Dominick’s Finer Foods and Safeway’s Canadian business.
(3) EBITDA is generally calculated consistent with the January Projections, but adjusted to exclude interest income and equity incentive compensation and to include for Safeway WholeCo and Safeway Ex-Blackhawk the equity method earnings of Casa Ley. Additionally, EBITDA for U.S. Grocery was adjusted for the value of the rent expense payable by the Company to PDC pursuant to the PDC Leases.
(4) Free Cash Flow is calculated as cash flow from operations less cash flow from investing activities (excluding any acquisitions).

 

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(5) Safeway Ex-Blackhawk includes U.S. Grocery, Casa Ley and PDC but excludes Blackhawk, Dominick’s Finer Foods and Safeway’s Canadian business.
(6) U.S. Grocery excludes Casa Ley, PDC, Blackhawk, Dominick’s Finer Foods and Safeway’s Canadian business.
(7) Amounts normalized to exclude one-time items such as, for 2013A, $3,047 in Net Income and $4,171 in Free Cash Flow relating to the Company’s disposition of its Canadian business and other immaterial one-time items.
(8) Amounts adjusted for the after-tax value of the $16.0 million in rent expense payable by the Company to PDC pursuant to the PDC Leases.
(9) The Company did not calculate Free Cash Flow for U.S. Grocery for 2013A.

Appraisal Rights

If you do not vote for the approval and adoption of the Merger Agreement at the Annual Meeting, if you make a written demand for appraisal prior to the taking of the vote on the approval and adoption of the Merger Agreement and if you otherwise comply with the applicable statutory procedures of Section 262 of the DGCL, as summarized herein, you may be entitled to appraisal rights under Section 262 of the DGCL. In order to exercise and perfect appraisal rights, a record holder of shares of Company common stock must follow the steps summarized below properly and in a timely manner.

Section 262 of the DGCL is reprinted in its entirety as Annex D to this Proxy Statement. Set forth below is a summary description of Section 262 of the DGCL. The following summary describes the material aspects of Section 262 of the DGCL, and the law relating to appraisal rights and is qualified in its entirety by reference to Annex D to this Proxy Statement. All references in Section 262 of the DGCL and this summary to “stockholder” are to the record holder of shares of Company common stock immediately prior to the effective time of the Merger as to which appraisal rights are asserted. Failure to comply strictly with the procedures set forth in Section 262 of the DGCL will result in the loss of appraisal rights.

Under the DGCL, holders of shares of Company common stock who follow the procedures set forth in Section 262 of the DGCL will be entitled to have their shares appraised by the Delaware Court of Chancery and to receive payment in cash of the “fair value” of those shares, exclusive of any element of value arising from the accomplishment or expectation of the Merger, as determined by the Delaware Court of Chancery.

Under Section 262 of the DGCL, when a merger agreement relating to a proposed merger is to be submitted for adoption at a meeting of stockholders, as in the case of the Annual Meeting, the corporation, not less than 20 days prior to such meeting, must notify each of its stockholders who was a stockholder on the record date for notice of such meeting with respect to such shares for which appraisal rights are available, that appraisal rights are so available, and must include in each such notice a copy of Section 262 of the DGCL. This Proxy Statement constitutes such notice to the holders of shares of Company common stock, and Section 262 of the DGCL is attached to this Proxy Statement as Annex D and incorporated herein by reference. Any stockholder who wishes to exercise such appraisal rights or who wishes to preserve his or her right to do so should review the following discussion and Annex D to this Proxy Statement carefully, because failure to timely and properly comply with the requirements and procedures specified in Section 262 of the DGCL will result in the loss of appraisal rights under the DGCL.

If you elect to demand appraisal of your shares, you must satisfy each of the following conditions:

 

   

You must deliver to the Company, before the vote with respect to the Merger is taken, a written demand for appraisal of your shares, which demand must reasonably inform the Company of the identity of the stockholder and that such stockholder intends thereby to demand appraisal of such stockholder’s shares of Company common stock. This written demand for appraisal must be in addition to and separate from any proxy or vote abstaining from or voting against the approval and adoption of the Merger Agreement and the Merger. Voting against, or failing to vote for, the approval and adoption of the Merger Agreement and the Merger by itself does not constitute a demand for appraisal within the meaning of Section 262 of the

 

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DGCL. The written demand for appraisal must reasonably inform us of the identity of the stockholder and the intention of the stockholder to demand appraisal of his, her or its shares.

 

    You must not vote in favor of, or consent in writing to, the approval and adoption the Merger Agreement and the Merger. A vote in favor of the approval and adoption of the Merger Agreement and the Merger, by proxy submitted by mail, over the internet, by telephone or in person, will constitute a waiver of your appraisal rights in respect of the shares so voted and will nullify any previously filed written demands for appraisal. A proxy which does not contain voting instructions will, unless revoked, be voted in favor of the approval and adoption of the Merger Agreement and the Merger. Therefore, a stockholder who votes by proxy and who wishes to exercise appraisal rights must vote against the Merger Agreement and the Merger or abstain from executing and returning the enclosed proxy card and from voting in person, or submitting a proxy by telephone or the internet, in favor of the proposal to approve and adopt the Merger Agreement. A vote or proxy against the approval and adoption of the Merger Agreement will not, in and of itself, constitute a demand for appraisal.

 

    You must continue to hold your shares of Company common stock through the effective date of the Merger. Therefore, a stockholder who is the record holder of shares of Company common stock on the date the written demand for appraisal is made but who thereafter transfers the shares prior to the effective date of the Merger will lose any right to appraisal with respect to such shares.

If you fail to comply with any of these conditions and the Merger is completed, you will be entitled to receive the Per Share Merger Consideration, but you will have no appraisal rights with respect to your shares of Company common stock.

Only a holder of record of Company common stock is entitled to assert appraisal rights for such shares of Company common stock registered in that holder’s name. A demand for appraisal should be executed by or on behalf of the holder of record, fully and correctly, as the holder’s name appears on the stock certificates or in the case of uncertificated shares, as the holder’s name appears on the stockholder register, and must state that such person intends thereby to demand appraisal of his, her or its shares. If the shares are owned of record in a fiduciary capacity, such as by a broker, dealer, commercial bank, trust company or other nominee, execution of the demand for appraisal should be made in that capacity, and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including one for two or more joint owners, may execute the demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, it, he or she is acting as agent for such owner or owners.

A record holder such as a broker, dealer, commercial bank, trust company or other nominee who holds shares as nominee for several beneficial owners may exercise appraisal rights with respect to the shares of Company common stock held for one or more beneficial owners while not exercising such rights with respect to the shares held for other beneficial owners; in such case, the written demand should set forth the number of shares as to which appraisal is sought. If the number of shares of Company common stock is not expressly stated, the demand will be presumed to cover all shares held in the name of the record owner. If you hold your shares in an account with a broker, dealer, commercial bank, trust company or other nominee and wish to exercise your appraisal rights, you are urged to consult with your broker, dealer, commercial bank, trust company or other nominee to determine the appropriate procedures for the making of a demand for appraisal.

All written demands for appraisal of shares of Company common stock must be mailed or delivered to: Safeway Inc., 5918 Stoneridge Mall Road, Pleasanton, California 94588-3229, Attn: Corporate Secretary, must be delivered prior to the vote on the approval and adoption of the Merger Agreement and should be executed by, or on behalf of, the record holder of the shares of Company common stock.

Within ten days after the effective date of the Merger, we will notify in writing each stockholder who has properly asserted appraisal rights under Section 262 of the DGCL and who has not voted in favor of, or consented to, the approval and adoption of the Merger Agreement as of the date of effectiveness of the Merger.

 

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Within 120 days after the effective time of the Merger, but not thereafter, we or any stockholder who has complied with the statutory requirements of Section 262 of the DGCL may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of Company common stock held by such stockholder. If no such petition is filed, appraisal rights will be lost for all stockholders who had previously demanded appraisal of their shares. We are not under any obligation, and we have no present intention, to file a petition with respect to appraisal of the fair value of the shares. Accordingly, if you wish to exercise your appraisal rights, you should regard it as your obligation to take all steps necessary to perfect your appraisal rights in the manner prescribed in Section 262 of the DGCL.

Within 120 days after the effective time of the Merger, any stockholder who has complied with the provisions of Section 262 of the DGCL will be entitled, upon written request, to receive from us a statement setting forth the aggregate number of shares of Company common stock not voted in favor of the approval and adoption of the Merger Agreement and with respect to which demands for appraisal were received by us, and the aggregate number of holders of such shares. Such statement must be mailed within ten days after the written request therefor has been received by us or within ten days after expiration of the period for delivery of appraisal demands, whichever is later. A person who is the beneficial owner of Company common stock held by a broker, dealer, commercial bank, trust company or other nominee on behalf of such person may, in such person’s own name, file an appraisal petition or request from us the statement described in this paragraph.

If a petition for an appraisal is timely filed and a copy thereof served upon us, we will then be obligated, within 20 days after receiving such service, to file in the office of the Delaware Register in Chancery in which the petition was filed, a duly verified list containing the names and addresses of the stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached. The Delaware Register in Chancery, if so ordered by the Delaware Court of Chancery, must give notice of the time and place fixed for the hearing of such petition by registered or certified mail to us and to the stockholders shown on the list at the addresses therein stated. Such notice must also be given by one or more publications at least one week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Delaware Court of Chancery deems advisable. The forms of the notices by mail and by publication must be approved by the Delaware Court of Chancery, and the costs thereof will be borne by us. At the hearing on such petition, the Delaware Court of Chancery will determine the stockholders who have complied with Section 262 and who have become entitled to appraisal rights. The Delaware Court of Chancery may require the stockholders who have demanded appraisal for their shares and who hold stock represented by certificates to submit their stock certificates to the Delaware Register in Chancery for notation thereon of the pendency of the appraisal proceedings; if any stockholder fails to comply with that direction, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder.

After the Court of Chancery determines which stockholders are entitled to appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Delaware Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceeding, the Delaware Court of Chancery shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Delaware Court of Chancery shall take into account all relevant factors. Unless the Delaware Court of Chancery in its discretion determines otherwise for good cause shown, interest from the effective time of the Merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective time of the Merger and the date of payment of the judgment.

If you are considering seeking appraisal, you should be aware that the fair value of your shares as determined under Section 262 of the DGCL could be more than, the same as or less than the Per Share Merger Consideration you are entitled to receive pursuant to the Merger Agreement if you did not seek appraisal of your shares and that investment banking opinions as to the fairness from a financial point of view of the Per Share Merger Consideration payable in the Merger are not necessarily opinions as to fair value under Section 262 of the DGCL.

 

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In determining the “fair value” of shares, the Delaware Court of Chancery will take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court stated that such factors include “market value, asset value, dividends, earning prospects, the nature of the enterprise and other facts which were known or which could be ascertained as of the date of the Merger which throw any light on future prospects of the merged corporation.” In Weinberger, the Delaware Supreme Court stated, among other things, that “proof of value by any techniques or methods generally considered acceptable in the financial community and otherwise admissible in court” should be considered in an appraisal proceeding. In addition, the Delaware Court of Chancery has decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a dissenter’s exclusive remedy.

The Delaware Court of Chancery will direct the payment of the fair value of the shares of Company common stock that have perfected appraisal rights, together with interest, if any, by us to the stockholders entitled thereto. The Delaware Court of Chancery will determine the amount of interest, if any, to be paid on the amounts to be received by persons whose shares of Company common stock have been appraised. The costs of the action (which do not include attorneys’ fees or expert fees or expenses) may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable. The Delaware Court of Chancery may also order that all or a portion of the expenses incurred by any stockholder in connection with an appraisal, including without limitation reasonable attorneys’ fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro-rata against the value of all of the shares entitled to appraisal. In the absence of such determination or assessment, each party bears its own expenses.

Any stockholder who has duly demanded and perfected an appraisal in compliance with Section 262 of the DGCL will not, after the effective time of the Merger, be entitled to vote his or her shares for any purpose or be entitled to the payment of dividends or other distributions thereon, except dividends or other distributions payable to holders of record of shares of Company common stock as of a date prior to the effective time of the Merger.

At any time within 60 days after the effective date of the Merger, any stockholder who has demanded an appraisal and who has not commenced an appraisal proceeding or joined that proceeding as a named party, shall have the right to withdraw such stockholder’s demand for appraisal and to accept the Per Share Merger Consideration in the manner prescribed in the Merger Agreement. After this period, a stockholder may withdraw his or her demand for appraisal only with our written consent.

If no petition for appraisal is filed with the Delaware Court of Chancery within 120 days after the effective time of the Merger, a stockholder’s right to appraisal will cease and he or she will be entitled to receive the Per Share Merger Consideration offered upon the Merger in the manner prescribed in the Merger Agreement, as if he or she had not demanded appraisal of his or her shares. No petition timely filed in the Delaware Court of Chancery demanding appraisal will be dismissed as to any stockholder without the approval of the Delaware Court of Chancery, and such approval may be conditioned on such terms as the Delaware Court of Chancery deems just; provided, however, that any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw his, her or its demand for appraisal and accept the Per Share Merger Consideration offered pursuant to the Merger Agreement within 60 days after the effective time of the Merger.

If you properly demand appraisal of your shares of Company common stock under Section 262 and you fail to perfect, or effectively withdraw or lose your right to appraisal, as provided in the DGCL, your shares of Company common stock will be converted into the right to receive the Per Share Merger Consideration offered pursuant to the Merger Agreement. You will fail to perfect, or effectively lose or withdraw your right to appraisal if, among other things, no petition for appraisal is filed within 120 days after the effective time of the Merger, or if you deliver to us a written withdrawal of your demand for appraisal. Any such attempt to withdraw an appraisal demand more than 60 days after the effective time of the Merger will require our written approval.

If you desire to exercise your appraisal rights, you must not vote for approval and adoption of the Merger Agreement and must strictly comply with the procedures set forth in Section 262 of the DGCL.

 

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Failure to take any required step in connection with the exercise of appraisal rights will result in the termination or waiver of such rights. In view of the complexity of Section 262 of the DGCL, stockholders who may wish to dissent from the Merger and pursue appraisal rights should consult their legal advisors.

Financing of the Merger

Equity Financing

Parent has entered into the equity commitment letter, dated March 6, 2014, with Cerberus Institutional Partners V, L.P., Jubilee Saturn ABS LLC, K-Saturn, LLC, Kimco Realty Services, Inc. and ColFin Safe Holdings, LLC, which we refer to as the equity investors in their capacity as equity investors, and with Sei, Inc. and Colony Financial, Inc., which together with Cerberus Institutional Partners V, L.P., K-Saturn, LLC and Kimco Realty Services, Inc. we refer to as sponsors in their capacity as sponsors, and with Cerberus, pursuant to which the equity investors have committed, on a several (not joint and several) basis, to purchase, and/or through one or more entities formed for the purpose of investing in Ultimate Parent, cause the purchase of, equity securities of Ultimate Parent at the closing of the Merger, for an amount equal to $1,250 million in the aggregate for the purpose of consummating the transactions contemplated by the Merger Agreement and the payment of related expenses.

Each equity investor may assign a portion of its equity commitment to affiliated investment funds but any such assignment shall not relieve such equity investor of its obligations to fund its equity commitment except to the extent its affiliated investment fund actually fulfills the equity commitment.

The equity investors’ obligations to fund the equity financing contemplated by the equity commitments are generally subject to (i) the satisfaction or waiver of each of the conditions to the Parent Entities’ obligations to consummate the transactions contemplated by the Merger Agreement, (ii) the substantially contemporaneous funding of the debt financing pursuant to the terms and conditions of the debt commitment letters described below or any alternative financing that Parent and Merger Sub accept from alternative sources pursuant to and in accordance with the Merger Agreement, (iii) the prior or substantially contemporaneous funding by each other equity investor (or any permitted replacement investor) of its commitment and (iv) the substantially contemporaneous closing of the Merger.

The Company is a third-party beneficiary of the equity commitment letter to the extent that (a) the Company seeks specific performance to cause each equity investor to fund its equity commitment in accordance with the terms of the equity commitment letter and the Merger Agreement and (b) the Company seeks specific performance of Ultimate Parent’s obligation to cause the equity investors to fund their respective equity commitments in certain circumstances in accordance with the terms of the Merger Agreement. The obligation of the equity investors to fund their respective equity commitments will terminate upon the earlier to occur of (i) the closing of the Merger, if such equity investor has fully satisfied its equity commitment pursuant to the equity commitment letter, (ii) the valid termination of the Merger Agreement in accordance with its terms, (iii) the commencement of any action by the Company or any of its affiliates against any party expressly excluded by the equity commitment letter or asserting a claim against any of the equity investors or certain of their affiliates other than claims expressly permitted by the equity commitment letter and (iv) payment in full of the Parent Termination Fee when required to be paid under the Merger Agreement.

The sponsors have agreed to cause their affiliated investment funds to comply with the equity commitment letter and to reasonably cooperate in connection with obtaining applicable regulatory approvals pursuant to the terms of the Merger Agreement and the equity commitment letter. The monetary liability for breach of the sponsors’ covenant is limited to recovery against Ultimate Parent for the Parent Termination Fee and certain other costs and expenses recoverable under the Merger Agreement.

The Company was also made a third party beneficiary to certain commitment letters, dated March 6, 2014, from (i) certain investment funds affiliated with K-Saturn, LLC, which we refer to as the K-Saturn Investors, and

 

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(ii) certain investment funds affiliated with Cerberus, which we refer to as the CIP V Investors, supporting K-Saturn, LLC’s and Cerberus Institutional Partners V, L.P.’s respective obligations under the equity commitment letter and the limited guaranty and on terms and conditions substantially similar to the equity commitment letter, including with respect to conditionality, termination and the Company’s third-party beneficiary rights.

Limited Guarantee

Pursuant to the limited guarantee delivered by the sponsors in favor of the Company, dated March 6, 2014, each sponsor has agreed to, severally, guarantee the due and punctual payment of such sponsor’s agreed upon percentage (which aggregate to 100% with respect to all sponsors) of (a) the Parent Termination Fee if, as and when required to be paid by the Parent Entities pursuant to the Merger Agreement and (b) certain other reimbursement and indemnification obligations of the Parent Entities pursuant to the Merger Agreement, including (i) the obligation of the Parent Entities to reimburse any costs and expenses of the Company or any of its affiliates to enforce the payment of the Parent Termination Fee, (ii) the obligation of the Parent Entities to reimburse the Company for certain portions of the filing fees required under the HSR Act, (iii) the obligation of the Parent Entities to reimburse or indemnify the Company for any fees, costs, and expenses it incurs in connection with its cooperation with the financing for the Merger (see “The Merger Agreement—Parent’s Financing Covenant; Company’s Financial Cooperation Covenant” beginning on page 131 for additional information), (iv) any indemnification obligations of the Parent Entities relating to the Company’s obligation to provide access to the Company prior to the closing of the Merger (see “The Merger Agreement—Access” beginning on page 152 for additional information) and (v) the obligation of the Parent Entities to reimburse the Company for any fees, costs, and expenses it incurs in connection with the EDS APA (we refer to such expense reimbursement and indemnification obligations as the expense obligations) as and when due. See “The Merger Agreement—Effect of Termination” beginning on page 145. Each sponsor’s obligations under the limited guarantee is subject to a cap equal to such sponsor’s agreed upon percentage (which aggregate to 100% with respect to all sponsors) of (x) the Parent Termination Fee plus (y) any expense obligations of the Parent Entities minus (z) to the extent the Parent Entities are relieved of all or any portion of their obligation to pay the Parent Termination Fee or their expense obligations by satisfaction thereof or pursuant to any written agreement with the Company, such relieved amount.

The limited guarantee will terminate upon the closing of the Merger. Any claims under the limited guarantee must be brought in a court of competent jurisdiction within 90 days following the valid termination of the Merger Agreement in accordance with the terms thereof.

Debt Financing

Parent received a debt commitment letter on March 6, 2014, an amended and restated debt commitment letter on March 28, 2014 and a further amended and restated debt commitment letter on April 3, 2014 as amended by a first amendment on April 24, 2014 (as so amended, the “debt commitment letter”) from Bank of America, N.A. (“Bank of America”), Merrill Lynch, Pierce, Fenner & Smith Incorporated and/or any of its affiliates (“Merrill”), Citigroup Global Markets Inc., Citibank, N.A., Citicorp USA, Inc., Citicorp North America, Inc., and/or any of their affiliates (“Citi”), Credit Suisse AG, Cayman Islands Branch (“CS”), Credit Suisse Securities (USA) LLC (“CS Securities”), Morgan Stanley Senior Funding, Inc. (“Morgan”), Barclays Bank PLC (“Barclays”), Deutsche Bank AG New York Branch (“DBNY”), Deutsche Bank AG Cayman Islands (“DBCI”), Deutsche Bank Securities Inc. (“DBSI”), PNC Bank, National Association (“PNC”), PNC Capital Markets LLC (“PCM”), US Bank National Association (“US Bank”), U.S. Bancorp Investments, Inc. (“USBI”), SunTrust Robinson Humphrey, Inc. (“STRH”) and SunTrust Bank (“SunTrust” and, together with Bank of America, Merrill, Citi, CS, CS Securities, Morgan, Barclays, DBNY, DBCI, DBSI, PNC, PCM, US Bank, USBI and STRH, the “Commitment Parties”), pursuant to which and subject to the conditions set forth therein, each of Bank of America, Citi, CS, Morgan, Barclays, DBNY, DBCI, PNC, US Bank and SunTrust (each an “Initial Lender” and collectively, the “Initial Lenders”) committed severally to provide Parent specified percentages

 

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(aggregating 100%) of a (i) $2,750,000,000 asset based revolving loan facility (the “ABL Facility”) and (ii) $6,700,000,000 term loan facility, which consists of a (A) Term Loan B-1 facility of $4,000,000,000 plus an amount sufficient to fund any original issue discount or upfront fees in respect of the Senior Facilities (as defined below) less an amount equal to 69% of any term loans under Parent’s existing term loan facility that remain outstanding on the closing of the Merger (the “Rolled Loans”), (B) Term Loan B-2 facility of $2,000,000,000 less an amount equal to 31% of any Rolled Loans, and (C) Term Loan B-3 facility of $700,000,000 (collectively, the “Term Facility,” and together with the ABL Facility, the “Senior Facilities”). In addition, to the extent Parent does not receive up to $1,625,000,000 of gross proceeds from the issuance of senior secured notes (“Senior Notes”) on the closing of the Merger, the borrower under the senior facilities (the “Borrower,” which refers to Parent, Merger Sub and/or certain subsidiaries of Parent, and after the closing of the Merger, the surviving corporation) may elect and certain of the Initial Lenders have each committed severally to provide to the Borrower an aggregate of up to $1,625,000,000 (minus the amount of gross proceeds from any Senior Notes issuance and the amount of ratably secured notes of the Company (other than the 7.45% debentures due 2027 and the 7.25% debentures due 2031) that are not purchased or redeemed or subject to a pending purchase or redemption on or prior to the closing of the Merger pursuant to a change of control offer, tender offer or redemption) of senior secured loans (the “Senior Bridge Loans”) under a new senior secured credit facility (the “Senior Bridge Facility” and together with the Senior Facilities, the “Facilities”).

The letters of credit and proceeds of loans under the ABL Facility (except as set forth below) will be available for working capital and general corporate purposes (including permitted acquisitions and other investments) after the closing of the Merger. Loans under the ABL Facility will be made available on the closing of the Merger in an aggregate principal amount of up to $1,750,000,000, (A) to finance a portion of the refinancing of the Borrower’s existing credit facilities, (B) to finance the consideration for the Merger and pay fees and expenses in connection with the Merger and the Facilities, and (C) to fund upfront fees or original issue discount in respect of the Facilities or incurred in connection with the Senior Notes.

Interest under the ABL Facility will be payable, at the option of the Borrower, either at LIBOR plus an applicable margin or at a base rate (based on the highest of the administrative agent’s prime rate, the Federal Funds Rate plus 0.50% and adjusted LIBOR for interest periods of one month plus 1.00%) plus an applicable margin.

The Term Facility will be available in a single drawing on the closing of the Merger. Interest under the Term Facility will be payable, at the option of the Borrower, either at an adjusted LIBOR-based rate (subject to a LIBOR floor) plus an applicable margin or at a base rate (based on the highest of the Term Facility administrative agent’s prime rate, the Federal Funds Rate plus 0.50% and an adjusted LIBOR for interest periods of one month plus 1.00%, after taking into account the LIBOR floor) plus an applicable margin.

Interest will be payable under the Senior Facilities at the end of each interest period set forth in the credit agreement to be entered into on the closing of the Merger (or, in the case of interest periods longer than three months, quarterly). The Term Loan B-1 facility will mature on the date that is seven years after the closing of the Merger, and will amortize in equal quarterly principal installments in an annual amount equal to 1.00% of the original principal amount of the Term Loan B-1, with the remaining balance payable on the final maturity date. The Term Loan B-2 facility will mature on the date that is five years after the closing of the Merger, and will amortize in equal quarterly principal installments during each year following the closing of the Merger in aggregate annual amounts equal to the percentage of the original principal amount of the Term Loan B-2 set forth opposite the relevant year occurring after the closing of the Merger in the table below, with the remaining balance payable on the final maturity date.

 

Year After Closing

  

Annual Percentage

Year 1

   5.00%

Year 2

   7.50%

Year 3

   12.50%

Year 4

   15.00%

Year 5

   3.75% for each of the first three quarters

 

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The Term Loan B-3 facility will mature on the date that is one year after the closing of the Merger, and will amortize in equal quarterly principal installments in an annual amount equal to 1.00% of the original principal amount of the Term Loan B-3, with the remaining balance payable on the final maturity date. The ABL Facility will mature on the date that is five years after the closing of the Merger, provided that the ABL Facility will have a springing maturity 91 days inside the final maturity of any material funded indebtedness of Parent or any of its subsidiaries, including the Term Loans B-2 and B-3 and any ratably secured notes of the Company if such other debt has not been repaid or extended prior to such 91st day.

The Senior Facilities will be guaranteed on a joint and several basis by Parent and each of Parent’s existing and future direct and indirect wholly-owned domestic subsidiaries that is not a borrower, excluding certain immaterial and other subsidiaries (the “Guarantors”). The ABL Facilities will be secured, subject to permitted prior liens and other agreed upon exceptions, by the following present and after-acquired assets of the Borrower and the Guarantors: (i) accounts receivable, inventory, chattel paper, prescription files, cash and deposit and security accounts (other than accounts containing solely proceeds of Term Facility Collateral); (ii) all general intangibles related to the foregoing (other than intellectual property), investment property (other than equity interests of the Borrower and the Guarantors), documents, instruments, commercial tort claims, supporting obligations, and letters of credit and letters of credit rights; (iii) all books and records related to the foregoing; and (iv) all proceeds and products of the foregoing (the “ABL Collateral”). The Term Facility will be secured, subject to permitted prior liens and other agreed upon exceptions, by the following present and after-acquired assets of the Borrower and the Guarantors: (i) all owned or mortgageable ground leased real properties (excluding surplus properties), all easements and other rights appurtenant thereto, all fixtures and improvements thereon and all equipment located thereon; (ii) all deposit and securities accounts that contain only proceeds of Term Facility Collateral; (iii) a pledge by Parent and each other Borrower and Guarantor of all of its right, title and interest in all of their respective equity interests in the Borrower and Guarantors; (iv) general intangibles (including intellectual property), investment property, documents, instruments, commercial tort claims, supporting obligations, and letters of credit and letter of credit rights in each case not constituting ABL Collateral; (v) all books and records related to the foregoing; and (vi) all proceeds of the foregoing (the “Term Facility Collateral”). Lenders under the Term Facility have a second priority lien in ABL Collateral. Lenders under the ABL Facility have a third priority lien in Term Facility Collateral.

Interest under the Senior Bridge Loans will initially equal an adjusted LIBOR-based rate (subject to a floor) plus an initial margin, increasing by 0.50% at the end of the first three-month period after the closing of the Merger and increasing by 0.50% at the end of each three-month period thereafter to a specified cap. The Senior Bridge Loans will be guaranteed on a joint and several basis by the Guarantors and will be secured by (i) perfected second priority (subject to permitted liens) security interests and liens on the Term Facility Collateral and (ii) perfected third priority (subject to permitted liens) security interests in and liens on the ABL Collateral.

Any Senior Bridge Loan not paid in full on or before the first anniversary of the closing of the Merger will be automatically converted into a senior secured term loan (a “Senior Term Loan”) with a maturity of eight years after the closing of the Merger. At any time on or after the date of such conversion, the applicable lenders may choose to exchange Senior Term Loans in whole or in part for senior exchange notes (“Senior Exchange Notes”). The principal amount of Senior Exchange Notes issued will equal the principal amount of Senior Term Loans exchanged. The Senior Exchange Notes will mature eight years after the closing of the Merger and will remain private.

The debt commitment letter expires on the earliest of (i) 5:00 pm on March 5, 2015, if the initial funding under the Facilities has not occurred by such time, (ii) the termination of the Merger Agreement, (iii) the closing of the Merger without the use of the Facilities, and (iv) in the case of the ABL Facility, the Term Facility or the Senior Secured Bridge Facility, in connection with a Delayed Draw Facility (as defined below). At any time after December 6, 2014, the Borrower may elect to extend the period for funding the applicable Facilities to June 5, 2015 (each, a “Delayed Draw Facility”) if certain of the conditions specified below with respect to the execution and delivery of the applicable definitive documentation and financial statements are satisfied. No borrowings would be made under such Delayed Draw Facility unless and until all of the conditions specified below are satisfied prior to June 5, 2015.

 

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The Initial Lenders’ commitments to provide the debt financing are subject to, among other things:

 

    the execution and delivery of definitive documentation with respect to the applicable Facilities consistent with the debt commitment letter (including the term sheets) and the applicable specified documentation principles;

 

    the closing of the $1,250,000,000 equity contribution, prior to or substantially simultaneously with the initial funding contemplated by the debt commitment letter;

 

    all existing indebtedness of the Company and the Borrower, other than capital leases, certain existing notes, any Rolled Loans and other permitted indebtedness, shall have been paid in full;

 

    the closing of the Merger (without any amendments to the Merger Agreement or waivers thereof that are materially adverse to the Commitment Parties (in their respective capacities) without the prior written consent of the Commitment Parties (such consent not to be unreasonably withheld or delayed));

 

    since December 28, 2013, there shall not have occurred any Company Material Adverse Effect;

 

    the delivery of certain audited, unaudited and pro forma financial statements;

 

    execution and delivery of documents and instruments required to perfect the security interest in the collateral and, if applicable, be in the proper form of filing (it being understood that, to the extent any collateral (other than certain specified assets) cannot be provided or perfected on the closing of the Merger after commercially reasonable efforts to do so or without undue burden or expense, the provisions and/or perfection of such collateral will not constitute a condition precedent to the availability of the Facilities on the closing of the Merger, but will be required to be provided and/or perfected within 90 days after the closing of the Merger (subject to extensions in the reasonable discretion of the applicable administrative agent);

 

    payment of specified fees and expenses pursuant to the debt commitment letter, fee letter and term sheets, to the extent invoiced before a specified date;

 

    the delivery of documentation and other information about the Borrower and Guarantors required under applicable “know your customer” and anti-money laundering rules and regulations, including the PATRIOT Act;

 

    the accuracy of certain specified representations and warranties made by the Borrower and the Guarantors in the definitive documentation of the applicable Facilities and such representations and warranties made by the Company in the Merger Agreement as are material to the interests of the lenders, but only to the extent that Parent has the right to terminate its obligations under the Merger Agreement as a result of a breach of such representations and warranties;

 

    with respect to the Senior Facilities, the Commitment Parties shall have been afforded a marketing period to syndicate each of the Senior Facilities; provided that certain customary blackout periods apply;

 

    with respect to the Senior Bridge Facility, the delivery by the Borrower of a customary preliminary offering memorandum or preliminary private placement memorandum suitable for use in a customary “high-yield road show;” and

 

    with respect to the ABL Facility, (A) the Commitment Parties shall have received customary appraisals and field exam reports and a borrowing base certificate and (B) after giving effect to all loans and letters of credit under the ABL Facility on the closing of the Merger, excess availability shall be not less than an agreed amount.

The Initial Lenders’ commitments to provide the debt financing are not conditioned upon a successful syndication of any of the Facilities with other institutions. No Initial Lender may assign all or any portion of its commitments under the debt commitment letter until after the closing of the Merger and, unless agreed to in writing by Parent, each Initial Lender shall retain exclusive control over all rights and obligations with respect to its commitments, including all rights with respect to consents, modifications, waivers and amendments.

 

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Albertson’s LLC has informed the Company of the following with respect to its plans for the outstanding notes and debentures of the Company:

 

    the debt commitment letter does not require the repayment of up to $80.0 million in principal amount of the Company’s 3.40% Senior Notes due 2016 (the “2016 Notes”) or up to $100.0 million in principal amount of the Company’s 6.35% Senior Notes due 2017 (the “2017 Notes”), and Albertson’s Holdings LLC may determine not to repay such indebtedness in connection with closing the Merger; and

 

    any of the Company’s 2016 Notes, 2017 Notes, 5.00% Senior Notes due 2019, 3.95% Notes due 2020, 4.75% Senior Notes due 2021, 7.45% Debentures due 2027 and 7.25% Debentures due 2031 that remain outstanding following completion of the Merger are expected to be equally and ratably secured by the assets of the Company and its subsidiaries that will secure the Senior Notes, and, if applicable, Senior Bridge Loans extended in lieu of the Senior Notes, but are not expected to be secured by any other assets of Parent or any of its other subsidiaries that will secure such Senior Notes or Senior Bridge Loans. The liens on the Company’s and its subsidiaries’ assets that will secure the Company’s notes and debentures that remain outstanding following the closing of the Merger are also expected to be junior in priority to the liens on the Company’s and its subsidiaries’ assets that secure the Term Facility and the ABL Facility.

Interests of the Company’s Directors and Executive Officers in the Merger

In considering the recommendation of the Board with respect to approving and adopting the Merger Agreement, you should be aware that certain members of the Board and the Company’s executive officers may have interests in the Merger that are different from, or are in addition to, interests of our stockholders generally. These interests may create an appearance of a conflict of interest. The Board was aware of these potential conflicts of interests during its deliberations on the merits of the Merger and in making its decisions in approving the Merger, the Merger Agreement, and the related transactions.

These interests are described in more detail below, and certain of them are quantified in the tables that follow the narrative below in the section entitled “Proposal 2—Merger-Related Compensation” beginning on page 172. The dates used below to quantify these interests have been selected for illustrative purposes only and do not necessarily reflect the dates on which certain events will occur. For further information with respect to the compensatory arrangements between the Company and its executive officers and directors, also see the sections entitled “—Background of the Merger” beginning on page 53 and “—Recommendation of the Board; Reasons for Recommending the Approval and Adoption of the Merger Agreement” beginning on page 71. Albertson’s LLC and Cerberus may from time to time engage in discussions with certain of our executive officers concerning their continuing roles with the combined company, including terms of employment and their future compensation (including potential equity incentive compensation); however, no such discussions were held prior to the signing of the Merger Agreement, except for Cerberus’ indication that it contemplated that Mr. Edwards would be the Chief Executive Officer of the combined company. See “—Background of the Merger” beginning on page 53.

In addition, the Merger Agreement provides that the Company is permitted to grant Company Options, restricted shares of Company common stock, Performance Share Awards or Restricted Stock Units pursuant to previously existing contractual arrangements of the Company set forth on a schedule or to employees of the Company in the ordinary course of business consistent with past practice. However, the Per Share Cash Merger Consideration required to be paid in respect of such Company Options, restricted shares of Company common stock, Performance Share Awards and/or Restricted Stock Units shall not be in excess of $15 million.

Treatment of Outstanding Company Stock Options

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each outstanding, unexpired and unexercised Company Option, that was granted under any Company Equity Incentive Plans, whether or not vested, shall be accelerated, vested and cancelled and converted into the right to receive an

 

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amount in cash (subject to any applicable withholding taxes) equal to the Option Payment. In addition, if the sale of the Casa Ley Interest and/or the PDC assets, as applicable, are not fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, then each Company Option shall be eligible to receive one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each share of Company common stock subject to such cancelled Company Option that has an Option Price less than the Per Share Cash Merger Consideration. Each Company Option with an Option Price (as of immediately prior to the effective time) that equals or exceeds the Per Share Cash Merger Consideration shall, immediately prior to the effective time, be cancelled without the payment of consideration.

Treatment of Outstanding Performance Share Awards, Restricted Stock Units and Restricted Shares

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each outstanding Performance Share Award that was granted under any Company Equity Incentive Plan shall vest at the target levels specified for each such award and shall be cancelled in exchange for the right to receive (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Company common stock subject to such Performance Share Award (after taking into account any vesting that occurs in connection with the preceding sentence) and (B) the Per Share Cash Merger Consideration and (ii) in the event that the sale of the Casa Ley Interest and/or the PDC assets, as applicable, have not been fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each vested share of Company common stock subject to such cancelled Performance Share Award.

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each outstanding Restricted Stock Unit, that was granted under any Company Equity Incentive Plan, whether or not then vested, shall be accelerated, vested and cancelled in exchange for the right to receive (i) an amount in cash (subject to any applicable withholding taxes) equal to the product of (A) the number of vested shares of Company common stock subject to such Restricted Stock Unit and (B) the Per Share Cash Merger Consideration and (ii) in the event that the sale of the Casa Ley Interest and/or the PDC assets, as applicable, have not been fully completed on or prior to the closing of the Merger or there is any deferred consideration that has not been paid to the Company with respect to pre-closing sales of the Casa Ley Interest and/or the PDC assets, one Casa Ley CVR and/or one PDC CVR, as applicable, in respect of each vested share of Company common stock subject to such Restricted Stock Unit.

The Merger Agreement provides that, immediately prior to the effective time of the Merger, each restricted share of Company common stock that is outstanding and that was granted pursuant to any Company Equity Incentive Plan whether or not then vested, shall automatically be accelerated, vest and all restrictions thereon shall lapse and be cancelled in exchange for the right to receive the Per Share Merger Consideration.

Treatment of Accounts in the Deferred Compensation Plan for Directors

Immediately prior to the effective time of the Merger, all shares credited in the “stock credit accounts” under the DCP and the DCPII shall be cancelled and, in exchange therefor, such accounts shall be credited with (i) an amount in cash equal to the product of (A) the number of shares of Company common stock credited to each such “stock credit account” and (B) the Per Share Cash Merger Consideration; (ii) in the event that the sale of the Casa Ley Interest has not been consummated prior to the effective time of the Merger, one Casa Ley CVR in respect of each share of Company common stock credited to each such “stock credit account;” and (iii) in the event that the PDC sale has not been consummated prior to the effective time of the Merger, one PDC CVR in respect of each share of Company common stock credited to each such “stock credit account.” All amounts credited under the DCP and the DCPII shall continue to be held and paid at such times and in accordance with the terms of the plans and any deferral and distribution elections made thereunder.

 

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Outstanding Equity Awards

The following table sets forth, for each of our directors and the named executive officers holding Company Options, Performance Share Awards, Restricted Stock Units or restricted shares of Company common stock as of May 30, 2014, (i) the aggregate number of shares of Company common stock subject to vested and unvested Company Options as of such date, (ii) the number of vested and unvested Restricted Stock Units held as of such date, (iii) the target number of Performance Share Awards held as of such date, and (iv) the number of restricted shares of Company common stock held as of such date. The following table also sets forth, for each of our directors and officers, the number of shares of Company common stock credited in their respective “stock credit accounts” under the DCP and DCPII, as applicable, as of May 30, 2014.

 

Name

   Vested Stock
Options
     Unvested
Stock
Options
     Unvested
Restricted
Stock Units
     Unvested
Performance
Share
Awards
     Unvested
Restricted
Stock
     Shares
credited to
DCP and
DCPII
 

Robert L. Edwards

     414,850         349,600         38,211         332,300         76,773         —     

Peter J. Bocian

     40,000         213,313         12,771         27,746         80,000         —     

Diane M. Dietz

     565,974         210,030         12,771         151,368         29,825         —     

Kelly P. Griffith

     53,509         139,945         12,771         131,871         21,660         —     

Larree M. Renda

     565,974         210,030         12,771         151,368         39,825         —     

Janet E. Grove

     —           —           —           —           —           84,572   

Mohan Gyani

     20,000         —           —           —           —           71,089   

Frank C. Herringer

     20,000         —           —           —           —           62,820   

George J. Morrow

     —           —           —           —           —           5,323   

Kenneth W. Oder

     20,000         —           —           —           —           65,494   

T. Gary Rogers

     —           —           —           —           —           23,270   

Arun Sarin

     20,000         —           —           —           —           32,124   

William Y. Tauscher

     —           —           —           —           —           —     

Steven A. Burd

     —           —           —           193,576         —           —     

Executive Severance Plan

The Company has adopted the Safeway Inc. Executive Severance Plan (the “Executive Severance Plan”), which provides for the payment of severance and other benefits to employees of the Company at the level of Vice President or above, including executive officers, in the event of a termination of employment with the Company without cause or for good reason, as defined in the Executive Severance Plan. The Executive Severance Plan provides that in the event of such a termination, executive officers will be eligible to receive continued payment of base salary and payment of COBRA premiums or contributions under the Safeway Inc. Welfare Benefits Plan for Retirees (the “Welfare Benefits Plan”), or the equivalent, for two years (in the case of the Chief Executive Officer) or 18 months (in the case of Executive Vice Presidents), in addition to a pro-rated cash bonus upon attainment of the applicable performance criteria. The Executive Severance Plan further provides that in the event of a termination without cause or for good reason during the 24-month period following a change in control, executive officers will be eligible to receive a lump sum payment equal to their base salary for two years (in the case of the Chief Executive Officer) or 18 months (in the case of Executive Vice Presidents), payment of COBRA premiums or contributions under our Welfare Benefits Plan, or the equivalent, for two years (in the case of the Chief Executive Officer) or 18 months (in the case of Executive Vice Presidents), and a lump sum payment equal to their target cash bonus for the year of termination.

Retention Bonus Plan

The Company has adopted the Safeway Inc. Retention Bonus Plan (the “Retention Plan”), for certain of our key employees, including each of the continuing named executive officers other than our CEO. The Retention Plan provides for the payment of a cash retention bonus on each of March 6, 2015 and March 6, 2016, subject to the applicable participant remaining employed through each such date, in an amount equal to a percentage of the

 

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participant’s annual base salary as in effect on March 6, 2014, in an amount ranging from 25% to 37.5%. For Executive Vice Presidents participating in the Retention Plan, including each of the participating named executive officers, each bonus payment shall be equal to 37.5% of their annual base salary. Notwithstanding the foregoing, in the event a participant’s employment with Safeway is terminated without cause or for good reason, each as defined in the Retention Plan, the participant is entitled to receive any unpaid cash retention bonus amounts in a lump sum as soon as practicable following termination.

Employee Benefits

The Merger Agreement requires Ultimate Parent to continue to provide certain compensation and benefits to non-union employees for a period of at least eighteen months following the closing of the Merger, as well as take certain actions in respect of employee benefits provided to our employees, including our executive officers. For a detailed description of these requirements, see “The Merger Agreement—Employee Benefit Matters” beginning on page 142.

Indemnification of Directors and Officers

The directors and officers of the Company are entitled to continued indemnification from and after the closing of the Merger. See “The Merger Agreement—Indemnification of Directors and Officers” beginning on page  151.

Dividends

Under the terms of the Merger Agreement, the Company is prohibited from authorizing, declaring, setting aside or paying any dividend or other distribution prior to the closing of the Merger, other than quarterly dividends per share of $0.20, $0.23, $0.23, $0.23 and $0.23, respectively, or of certain net proceeds from sales of the Casa Ley Interest and/or PDC, subject to certain exceptions. Although the Company expects to continue to pay quarterly dividends on the Company common stock, the payment of future dividends is at the discretion of the Board and will depend upon the Company’s earnings, capital requirements, financial condition and other factors. Since the date of the execution of the Merger Agreement, the Company has paid a quarterly dividend of $0.20 per share of Company common stock and the Board has declared a second quarterly dividend of $0.23 per share of Company common stock payable to holders of record on June 19, 2014 to be paid on July 10, 2014. See “Market Price and Dividend Information” beginning on page 39.

Regulatory Matters

In connection with the Merger, we are required to make certain filings with, and comply with certain laws of, various federal and state governmental agencies, including:

 

    filing the certificate of merger with the Secretary of State of the State of Delaware in accordance with the DGCL after the approval and adoption of the Merger Agreement by our stockholders; and

 

    complying with U.S. federal securities laws.

In addition, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), and the related rules and regulations that have been issued by the Federal Trade Commission (the “FTC”), certain transactions having a value above specified thresholds may not be consummated until specified information and documentary material have been furnished to the FTC and the Antitrust Division of the Department of Justice (the “DOJ”) and certain waiting period requirements have been satisfied. The requirements of the HSR Act apply to the acquisition of shares of Company common stock in the Merger. The Company and the Parent Entities filed the notification and report forms under the HSR Act with the FTC and the Antitrust Division of the DOJ on March 11, 2014. On April 10, 2014, the Company and the Parent Entities each received a request for additional information and documentary materials from the FTC with respect to the Merger. The waiting period will not begin until both the Company and the Parent Entities are in substantial compliance with such request. The

 

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Company and the Parent Entities have been cooperating fully and completely and producing documents in connection with the FTC’s investigation of the Merger.

At any time before or after closing of the Merger, notwithstanding the expiration or termination of required waiting periods and the receipt of any other required approvals, the Antitrust Division of the DOJ, the FTC or state or foreign antitrust and competition authorities could take such action under applicable antitrust or competition laws as each deems necessary or desirable in the public interest, including seeking to enjoin the closing of the Merger or seeking divestiture or licensing of substantial assets and businesses, including assets and businesses of the Company and/or the Parent Entities or their respective affiliates. Private parties may also seek to take legal action under the antitrust and competition laws under certain circumstances.

Material United States Federal Income Tax Consequences

The following discussion summarizes the material U.S. federal income tax consequences of the Merger that are generally applicable to U.S. holders (as defined below). Unless otherwise indicated, this summary deals only with Company stockholders who hold their shares of Company common stock as capital assets. This discussion is based on the United States Internal Revenue Code of 1986, as amended (the “Code”), the proposed, temporary and final Treasury regulations promulgated thereunder, and any relevant administrative rulings or pronouncements or judicial decisions, all as in effect on the date of this Proxy Statement and all of which are subject to change, possibly with retroactive effect. Neither the Company nor the Parent Entities has sought, nor will they seek, a ruling from the Internal Revenue Service (the “IRS”) regarding the U.S. federal income tax consequences of the Merger to U.S. holders. Accordingly, there can be no assurance that the IRS will not take a contrary position regarding the tax consequences of the Merger described in this discussion or that any such contrary position would not be sustained. The discussion does not deal with all U.S. federal income tax considerations that may be relevant to particular classes of Company stockholders in light of their special circumstances, such as stockholders who are dealers or brokers in securities, tax-exempt organizations, banks, insurance companies or other financial institutions, mutual funds, regulated investment companies and real estate investment trusts, partnerships and other pass-through entities (or persons holding Company common stock through such entities), persons holding Company common stock as part of a hedge, appreciated financial position, straddle, constructive sale, conversion transaction or other risk reduction transaction, persons who have a functional currency other than the U.S. dollar, persons who are subject to the alternative minimum tax or persons who acquired their Company common stock upon exercise of employee stock options or in other compensatory transactions. Furthermore, no state, local or foreign tax considerations are addressed herein. In addition, the discussion does not address the tax consequences of transactions effectuated prior to or after the Merger (whether or not such transactions occur in connection with the Merger). Finally, this discussion does not address the tax consequences to holders of shares of Company common stock who exercise appraisal rights.

This summary does not discuss any U.S. federal income tax considerations to persons holding Company common stock who are not “U.S. holders” (as defined below). If you are not a U.S. holder, you should consult with your own tax advisor as to the consequences under U.S. federal, state and local tax laws and foreign tax laws with respect to the Merger, including the potential application of withholding tax to payments on the CVRs.

All holders of shares of Company common stock should consult their tax advisors as to the specific federal, state, local and foreign tax consequences to them of the Merger.

For purposes of this discussion, the term “U.S. holder” means a beneficial owner of Company common stock who is (a) an individual citizen or resident of the United States, (b) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (c) an estate the income of which is subject to United States federal income taxation regardless of its source or (d) a trust that (1) is subject to the primary supervision of a United States court and the control of one or more United States persons (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a United States person.

 

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If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) holds shares of Company common stock, the tax treatment of a partner in the partnership will generally depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold such shares and partners in such partnerships should consult their tax advisors regarding the specific U.S. federal income tax consequences of the Merger to them.

General

An exchange of shares of Company common stock for the Per Share Merger Consideration pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. The amount of gain or loss a holder of Company common stock recognizes, and the timing and potentially the character of a portion of such gain or loss, depends in part on the U.S. federal income tax treatment of the CVRs, with respect to which there is substantial uncertainty.

The receipt of the Per Share Merger Consideration may be treated as either a “closed transaction” or an “open transaction” for U.S. federal income tax purposes. There is no authority directly on point addressing whether a sale of property for, in whole or in part, contingent value rights with characteristics similar to the CVRs should be taxed as “open transactions” or “closed transactions,” and the issue is inherently factual in nature. Accordingly, holders are urged to consult their tax advisors regarding this issue. The installment method of reporting will not be available with respect to any gain attributable to the receipt of a CVR because the Company common stock is traded on an established securities market.

It is possible, although neither the Company nor any of the Parent Entities expects this to be the case, that the CVRs could be treated as one or more “debt instruments.” If that is the case, payments received with respect to the CVRs generally should be treated as payments in retirement (or partial retirement) of a “debt instrument,” except to the extent interest is imputed under the rules of Section 1274 and Section 1275 of the Code, and a U.S. holder would include the interest in income on an annual basis, whether or not currently paid. The remainder of the disclosure assumes that the CVRs are not treated as debt instruments.

The Company and the Parent Entities currently intend to act consistently with “closed transaction” treatment, including cooperating with the Paying Agent to send Form 1099-Bs reflecting the Company’s and Ultimate Parent’s determination of the fair market value of the CVRs in the Merger. The Company’s and the Parent Entities’ views and actions (and the fair market value figure ascribed to the CVRs as of the time of the Merger) are not dispositive with respect to the tax treatment or fair market value of the CVRs and are not binding on the IRS as to the holder’s tax treatment or the fair market value of the CVRs.

The following sections discuss the tax consequences of the Merger if the receipt of the Per Share Merger Consideration is treated as a closed transaction or, alternatively, as an open transaction. The Company and the Parent Entities urge you to consult your tax advisor with respect to the proper characterization of the receipt of the CVRs.

Treatment of Consideration Received Upon the Closing of the Merger

Under either “closed” or “open” transaction treatment, gain or loss recognized in the transaction must be determined separately for each identifiable block of Company common stock surrendered in the Merger (i.e. shares of Company common stock acquired at the same cost in a single transaction). Any such gain or loss will be long-term if the Company common stock is held for more than one year before such disposition. For U.S. stockholders that are individuals, estates or trusts, long-term capital gain generally is taxed at preferential rates. The deductibility of both long-term and short-term capital loss is subject to certain limitations.

Treatment as Closed Transaction. If the value of the CVRs can be “reasonably ascertained,” the transaction should generally be treated as “closed” for U.S. federal income tax purposes, in which event a U.S. holder should

 

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generally recognize capital gain or loss for U.S. federal income tax purposes upon closing of the Merger equal to the difference between (x) the sum of (i) the amount of cash received and (ii) the fair market value (determined as of the closing of the Merger) of the CVRs received, and (y) such U.S. holder’s adjusted tax basis in the Company common stock surrendered pursuant the Merger. Under such treatment, a U.S. holder’s initial tax basis in the CVRs will equal the fair market value of the CVRs on the date of the closing of the Merger, and the holding period of the CVRs should begin on the day following the date of the closing of the Merger.

Treatment as Open Transaction. If the value of the CVRs cannot be “reasonably ascertained,” the receipt of the CVRs would generally qualify as an “open transaction.” If the receipt of the Per Share Merger Consideration is treated as an “open transaction” for U.S. federal income tax purposes, a U.S. holder would generally recognize capital gain for U.S. federal income tax purposes in the year of the Merger if and to the extent the amount of cash received upon the closing of the Merger exceeds such U.S. holder’s adjusted tax basis in the Company common stock surrendered pursuant to the Merger (but would not recognize loss for U.S. federal income tax purposes in the year of the Merger if such adjusted tax basis exceeds the amount of cash received upon the closing of the Merger).

Subject to the Section 483 Rules discussed below, if the transaction is “open” for U.S. federal income tax purposes, the fair market value of the CVRs at the closing of the Merger would not be taken into account in determining the holder’s taxable gain upon receipt of the Per Share Merger Consideration, and a U.S. holder would take no tax basis in the CVRs but would recognize capital gain as payments with respect to the CVRs are made or deemed made in accordance with the U.S. holder’s regular method of accounting, but only to the extent the sum of such payments (and all previous payments under the CVRs), together with the amount of cash received upon closing of the Merger, exceeds such U.S. stockholder’s adjusted tax basis in the Company common stock surrendered pursuant the Merger.

Subject to the Section 483 Rules discussed below, if the transaction is “open” for U.S. federal income tax purposes, a U.S. holder who does not receive an amount of cumulative cash proceeds pursuant to the Merger (including as payments on the CVRs) at least equal to such U.S. stockholder’s adjusted tax basis in the Company common stock surrendered pursuant to the Merger will recognize a capital loss in the year that the U.S. holder’s right to receive further payments under the CVRs terminates.

Future Payments on the CVRs

Treatment as Closed Transaction. If the transaction is treated as a “closed transaction,” there is no direct authority with respect to the tax treatment of holding and receiving payments with respect to property similar to the CVRs. It is possible that payments received with respect to a CVR, up to the amount of the U.S. holder’s adjusted tax basis in the CVR, may be treated as a non-taxable return of a U.S. holder’s adjusted tax basis in the CVR, with any amount received in excess of basis treated as gain from the disposition of the CVR. Additionally, a portion of any payment received with respect to a CVR may constitute imputed interest or ordinary income under the Section 483 Rules discussed below. If not treated as described above, payments with respect to a CVR may be treated as either (i) payments with respect to a sale of a capital asset, (ii) ordinary income or (iii) dividends.

Treatment as Open Transaction. If the transaction is treated as an “open transaction,” a payment pursuant to a CVR to a U.S. holder of a CVR should be treated as a payment under a contract for the sale or exchange of Company common stock to which Section 483 of the Code may apply (the “Section 483 Rules”). Under the Section 483 Rules, a portion of the payments made pursuant to a CVR may be treated as interest, which would be ordinary income to the U.S. stockholder of a CVR. The interest amount would equal the excess of the amount received over its present value at the closing of the Merger, calculated using the applicable federal rate as the discount rate. A U.S. holder must include in its taxable income interest pursuant to the Section 483 Rules in accordance with such U.S. holder’s regular method of accounting. The portion of the payment pursuant to a CVR that is not treated as interest under the Section 483 Rules would generally be treated as a payment with respect to the sale of Company common stock, as discussed above under “Treatment of Consideration Received Upon Closing of the Merger—Treatment as Open Transaction.

 

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Due to the legal and factual uncertainty regarding the valuation and tax treatment of the CVRs, U.S. holders are urged to consult their tax advisors concerning the recognition of any gain or loss resulting from the receipt of the CVRs in the Merger and the tax consequences of the receipt of any payments under the CVRs after the Merger.

3.8% Medicare Tax on “Net Investment Income”

Certain U.S. holders that are individuals, estates and trusts generally will be subject to a 3.8% Medicare tax on their “net investment income.” U.S. stockholders should consult their tax advisors regarding the applicability of the Medicare tax with respect to the disposition of Company common stock.

Information Reporting and Backup Withholding

In general, any payments made to a U.S. holder in exchange for Company common stock in the Merger or pursuant to the CVRs will be reported to the IRS unless the holder is an exempt recipient and appropriately certifies as to his, her or its status. Backup withholding, currently at a rate of 28%, may apply unless the U.S. holder (1) is an exempt recipient or (2) provides a certificate (generally on an IRS Form W-9) containing the holder’s name, address, correct federal taxpayer identification number and a statement that the holder is a U.S. person and is not subject to backup withholding.

Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS.

We have not sought and will not seek any opinion of counsel or any ruling from the Internal Revenue Service with respect to the matters discussed herein. We urge holders of shares of Company common stock to consult their tax advisors with respect to the specific tax consequences to them in connection with the Merger in light of their own particular circumstances, including the tax consequences under state, local, foreign and other tax laws.

Delisting and Deregistration of the Company Common Stock

If the Merger is completed, the shares of Company common stock will be delisted from the New York Stock Exchange and deregistered under the Exchange Act, and shares of Company common stock will no longer be publicly traded.

Litigation Relating to the Merger

Since the announcement of the Merger, 14 purported class action complaints were filed by alleged stockholders of the Company against the Company, the individual directors of the Company, and against Cerberus, Ultimate Parent, Parent, Albertson’s LLC and/or Merger Sub. Seven lawsuits were filed in the Delaware Court of Chancery, captioned Barnhard v. Safeway Inc., et al., C.A. No. 9445-VCL (March 13, 2014); Morales v. Safeway Inc., et al., C.A. No. 9455-VCL (March 18, 2014); Ogurkiewicz v. Safeway Inc., et al., C.A. No. 9454- VCL (March 18, 2014); Pipefitters Local 636 Defined Benefit Fund and Oklahoma Firefighters Pension and Retirement System v. Safeway Inc., et al., C.A. No. 9461-VCL (March 20, 2014); Cleveland Bakers and Teamsters Pension and Health & Welfare Funds v. Safeway Inc., et al., C.A. No. 9466-VCL (March 24, 2014); KBC Asset Management NV, Erste-Sparinvest Kapitalanlagegesellschaft m.b.H., Louisiana Municipal Police Employees’ Retirement System, and Bristol County Retirement System v. Safeway Inc., et al., C.A. No. 9492-VCL (March 31, 2014); and The City of Atlanta Firefighters’ Pension Fund v. Safeway Inc., et al., C.A. No. 9495-VCL (April 1, 2014), which have been consolidated by order of the Court as In Re Safeway Inc. Stockholders Litigation, Consol. C.A. 9445-VCL (the “Delaware Action”).

 

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Four other lawsuits were filed in the Superior Court of the State of California, County of Alameda, captioned Lopez v. Safeway Inc., et al., Case No. HG14716651 (March 7, 2014); Groen v. Safeway Inc., et al., Case No. RG14716641 (March 7, 2014); Ettinger v. Safeway Inc., et al., Case No. RG14716842 (March 11, 2014); and Brockton Ret. Board v. Edwards, et al., Case No. RG 14720450 (April 7, 2014), which were consolidated by order of the court (collectively, the “Consolidated California State Actions”). On May 7, 2014, an amended complaint was filed in the Consolidated California State Actions. On May 14, 2014, the court in the above-referenced actions entered an order dismissing the Consolidated California State Actions, finding that the plaintiffs were contractually obligated to bring their claims against defendants in the Delaware Court of Chancery in light of the forum selection clause in the Company’s By-Laws.

Three other lawsuits were filed in the United States District Court for the Northern District of California, and are captioned Steamfitters Local 449 Pensions Fund v. Safeway Inc., et al., Case No. 4:14-cv-01670 (April 10, 2014) (the “Steamfitters action”); Romaneck v. Safeway Inc., et al., Case No. 4:14-cv-02015 (May 1, 2014) (the “Romaneck action”); and Templeton v. Safeway Inc., et al., Case No. 3:14-cv-02412 (May 23, 20214) (collectively, the “Federal Court Actions”). An amended complaint was filed in the Steamfitters action on May 15, 2014.

Each of the cases is purportedly brought on behalf of the Company stockholder class. Collectively, the actions generally allege that the members of the Board breached their fiduciary duties in connection with the Merger because, among other things, the Merger involves an unfair price, a flawed sales process and preclusive deal protection devices. The actions allege that the Company and various combinations of the Parent Entities aided and abetted those alleged breaches of fiduciary duty. The amended complaint in the dismissed Consolidated California State Actions further alleged that the Proxy Statement fails to disclose material information relating to, among other things, the fairness opinions of Goldman Sachs and Greenhill, the Company’s financial projections, analyses concerning the intrinsic value of Blackhawk, and the background of the proposed transaction. The Federal Court Actions also allege that the defendants violated Sections 14 and 20(a) of the Exchange Act because the Proxy Statement fails to disclose material information relating to, among other things, the background of the proposed transaction, the fairness opinions of Goldman Sachs and Greenhill and the Company’s financial projections. Among other remedies, the lawsuits seek to enjoin the Merger, or in the event that an injunction is not entered and the Merger closes, rescission of the Merger or unspecified money damages, costs and attorneys’ and experts’ fees.

On June 13, 2014, the defendants reached an agreement-in-principle providing for a settlement of all of the claims in the Delaware Action on the terms and conditions set forth in a memorandum of understanding (the “Memorandum of Understanding”). Pursuant to the Memorandum of Understanding:

 

    the Board amended the Merger Agreement (which such amendments are incorporated into Amendment No. 2) to (i) change the terms of the PDC CVR Agreement so that, among other things, the PDC Holders would, instead of not receiving any value for any PDC assets that remain unsold at the end of the PDC Sale Deadline, be entitled to the fair market value of the unsold PDC assets, after the payment of certain fees, expenses and debt repayments, and net of certain assumed taxes (based on a 39.25% rate) and (ii) change the terms of the Casa Ley CVR Agreement to, among other things, (A) reduce the Casa Ley Sale Deadline from four years to three years and (B) provide that in the event that any equity interests of Casa Ley owned by the Company remain unsold as of the Casa Ley Sale Deadline, the fair market value determination to be made either mutually by the Company and the Shareholder Representative or by an independent investment banking firm shall exclude any minority, liquidity or similar discount regarding such equity interests relative to the value of Casa Ley in its entirety;

 

    the Board adopted the Company Rights Agreement Amendment to accelerate the expiration date of the Company Rights Agreement; and

 

    the Company made certain changes to this Proxy Statement.

The settlement will be subject to the approval of the Delaware Chancery Court. The Company and the Board believe these claims are entirely without merit and, in the event the settlement does not resolve them, the Company and the Board intend to vigorously defend these actions.

 

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THE MERGER AGREEMENT

The following is a summary of the material terms and conditions of the Merger Agreement. The description in this section and elsewhere in this Proxy Statement is qualified in its entirety by reference to the complete text of the Merger Agreement attached to this Proxy Statement as Annex A, Amendment No. 1 to the Merger Agreement, dated April 7, 2014, attached to this Proxy Statement as Annex B, and Amendment No. 2 to the Merger Agreement, dated June 13, 2014, attached to this Proxy Statement as Annex C, and, collectively, are incorporated by reference herein. This summary does not purport to be complete and may not contain all of the information about the Merger Agreement that is important to you. We encourage you to read the Merger Agreement carefully and in its entirety because it is the legal document that governs the Merger.

Explanatory Note Regarding the Merger Agreement

The Merger Agreement and this summary of its terms have been included to provide you with information regarding the terms of the Merger Agreement. Factual disclosures about the Company contained in this Proxy Statement or in the Company’s public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the Merger Agreement and described in this summary. The representations, warranties and covenants made in the Merger Agreement by the Company and the Parent Entities to the other parties to the Merger Agreement were qualified and subject to important limitations agreed to by the Company and the Parent Entities in connection with negotiating the terms of the Merger Agreement. In particular, in your review of the representations and warranties contained in the Merger Agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the Merger Agreement may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue, due to a change in circumstance or otherwise, and allocating risk between the parties to the Merger Agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and reports and documents filed with the SEC, and in some cases were qualified by disclosures that were made by each party to the Merger Agreement to the other, which disclosures are not reflected in the Merger Agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this Proxy Statement, may have changed since the date of the Merger Agreement, March 6, 2014.

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

The Merger Agreement provides for the merger of Merger Sub with and into the Company, with the Company as the surviving corporation, upon the terms, and subject to the conditions, set forth in the Merger Agreement (the “Merger”). As the surviving corporation of the Merger, the Company will continue to exist as a wholly-owned subsidiary of Parent following the Merger.

The board of directors of the surviving corporation will, from and after the effective time of the Merger, consist of the directors of Merger Sub immediately prior to the Merger until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal. The officers of the surviving corporation will, from and after the effective time of the Merger, consist of the officers of the Company immediately prior to the Merger until their successors have been duly appointed and qualified or until their earlier death, resignation or removal.

At the effective time of the Merger, the certificate of incorporation and bylaws of the surviving corporation will be amended and restated to conform with those attached as Exhibit D and Exhibit E, respectively, of the Merger Agreement, until amended in accordance with the